Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated Third Quarter 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.
Good morning and good evening, everyone. Welcome to NIO's Third 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, and Mr. Stanley Qu, Senior Vice President 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 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.
Hello, everyone. Thank you for joining NIO's third quarter 2021 earnings call. In the third quarter of 2021, we delivered 24,439 ES8s, ES6, and EC6, a new quarterly record representing a solid growth of 100.2% year-over-year.
Based on the overall production planning from September 28- October 15, to prepare for further capacity expansion and new products introduction, including ET7, we implemented upgrades and the restructuring of the manufacturing lines at the Hefei JAC-NIO Advanced Manufacturing Center. Affected by the upgrades and the restructuring, we delivered 3,667 vehicles in October. The plant has resumed normal production since late October. According to the data published by China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. As the automotive industry is accelerating its transformation towards smartization and electrification, more and more users are now choosing smart EVs over ICEs. The order momentum continues to be strong, and our new orders have reached a new all-time high in October. Currently, our delivery volume is mainly constrained by supply chain volatilities.
We expect the total delivery in the fourth quarter of 2021 to be between 23,500-25,500 vehicles. In the third quarter, the vehicle gross margin stood at 18.0%, while the overall gross margin reached 20.3%, benefited from the sales of a regulatory credit. Next, I would like to share with you some recent operational highlights of the company.
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In September, the first batch of ET7 tooling trial builds rolled off the production line, representing that the tryout and commissioning of the overall manufacturing process have been completed. The teams are making final preparations for the mass production of ET7. During this preparation process, we have also made various product optimizations on ET7. For example, the drag coefficient of ET7 was improved from 0.23- 0.208. We are very confident about the final product competitiveness and the market performance of the ET7.
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The software and hardware development of NAD are also pressing ahead on schedule. The development of the other two new products on new technology platform 2.0 are also moving forward smoothly, and the delivery to users is expected to start in the second half of next year. We will share more product details at NIO Day 2021.
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In September, we launched the 75 kWh standard range battery pack with LFP NCM hybrid cells, which has further enhanced the competitiveness of NIO's battery system, empowered by the industry-first LFP NCM cell layout and advanced software and hardware systems of thermal management and SoC estimation. NIO's battery system team worked closely with our partner in overcoming the disadvantages of the LFP cells in aspects of low-temperature performance and SoC estimation. On top of that, the 75 kWh hybrid battery pack has also achieved higher energy density and longer drive range and lower cost compared with the 70 kWh NCM battery pack.
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In terms of production capacity, besides the upgrades and the restructuring of the manufacturing lines in JAC-NIO Advanced Manufacturing Center, the second manufacturing site at NIO Park in Hefei is also under construction. After the kickoff on April 29, we completed the main structure construction on August 26, and will start the equipment installation at end of this month. In the third quarter of 2022, we will begin production officially.
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On the supply side, due to global COVID-19 pandemic, extreme weather events and other factors, the overall supply chain remained challenging. Our supply chain team, R&D team and partners have adopted a series of measures to support the record high quarterly delivery in the third quarter, and will continue to secure the supply for the delivery in the fourth quarter and upcoming new product production.
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With regards to the sales and service network, we now have 32 NIO Houses and 285 NIO Spaces in 132 cities in China. We'll continue to expand and optimize our NIO House and NIO Space coverage to effectively penetrate into more Tier 2 and Tier 3 cities. As of now, we have 43 NIO Service Centers and 181 authorized service centers in 141 cities. We will build more service centers to ensure high quality services to the rapidly growing user base.
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Up until now, we have deployed 608 battery swap stations in 153 cities in China, and completed over 4.74 million swaps. In addition, we have built over 460 power charger stations and 3,155 destination chargers across China.
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As we speed up the deployment of the battery swapping and charging infrastructure, the superior experience and value brought forward by battery swapping technology and battery as a service have made BaaS the go-to choice for more and more users.
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Regarding the global market, we opened our new NIO House in Norway on September 30, which has attracted wide attention from both the public and the media. On the same day, we started to deliver ES8 and provide services to our users in Norway. Besides achieving Euro NCAP five-star safety rating, the ES8 has also received rave reviews on its performance and the product experience from the local users and the media. The order intake has exceeded our expectations. More importantly, among all the orders, 92% of the users have chosen BaaS. NIO's product, services, and innovative business model not only have been well received in China, but also present unique value and strength in the global market. In 2022, we will further step up our efforts in entering more global markets.
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Users have always been the foundation of NIO. A diversified user community brings a greater vitality to NIO and drives NIO to become better. In October, NIO and the NIO User Trust joined hands with Sanjiangyuan Ecological Protection Foundation to build a green ecosystem in the Sanjiangyuan National Park. With much anticipation, we have announced that NIO Day 2021 will be held in Suzhou on December 18 this year. NIO user advisors and the NIO Day Organizing Committee are working closely on the final preparation. Please stay tuned for the coming NIO Day organized together by NIO and our users.
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In 2021, NIO has doubled down on investment in product development, capacity expansion, charging and swapping network, as well as the sales and service network. In 2022, we will continue to make a decisive investment to further enhance our long-term competitiveness and provide better products and services to users.
Steven.
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.
Thank you, William Li. I will run over our key financial results for the third 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 third quarter were CNY 9.81 billion, or $1.52 billion, representing an increase of 116.6% year-over-year, an increase of 16.1% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were CNY 8.64 billion or $1.34 billion, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year-over-year, an increase of 9.2% quarter-over-quarter.
The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to the increase of vehicle delivery volume. Other sales in third quarter were CNY 1.1 billion or $181.4 million, representing an increase of 350.8% year-over-year, an increase of 170.9% quarter-over-quarter. The increase in other sales year-over-year and quarter-over-quarter was mainly due to the sales of automotive regulatory credits and the batteries upgrade service, as well as other revenues, which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was CNY 10.81 billion or $1.21 billion, representing an increase of 98.3% year-over-year and an increase of 13.6% 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 third quarter of 2021. Gross profit in the third quarter was CNY 1.99 billion or $0.31 billion, representing an increase of 240.3% year-over-year, an increase of 26.6% quarter-over-quarter. Gross margin in the third quarter was 20.3% compared with 12.9% in the same quarter of 2020, and 18.6% in the second quarter of 2021. The increase of gross margin year-over-year was mainly driven by the increase of vehicle margin and the sales of automotive regulatory credits.
The increase of gross margin quarter-over-quarter was mainly due to the sales of automotive regulatory credits. More specifically, vehicle margin in third quarter was 18.0% compared with 14.5% in the same quarter of 2020 and 20.3% in the second quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price, as well as lower material costs. The decrease of vehicle margin quarter-over-quarter was mainly due to the increased financing at subsidized rates for vehicle purchases, which resulted in a deduction of vehicle revenue and increase in tooling depreciation costs. R&D expenses in the third quarter were CNY 1.19 billion or $185.2 million, representing an increase of 101.9% year-over-year, an increase of 35% quarter-over-quarter.
The increase of R&D expenses year-over-year and quarter-over-quarter was mainly attributed to increased personnel costs in research and development functions, as well as incremental design and development costs for new products and technologies. SG&A expenses in the third quarter were CNY 1.82 billion or $0.28 billion, representing an increase of 94.1% year-over-year, an increase of 21.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to the increase of personnel costs in sales and service functions and costs related to sales and service network expansion. Lastly, operating expenses in the third quarter were CNY 0.99 billion or $153.9 million, representing an increase of 4.9% year-over-year and an increase of 29.9% quarter-over-quarter.
Share-based compensation expenses in the third quarter were CNY 255.6 million or $41.2 million, representing an increase of 439.8% year-over-year, an increase of 5.6% quarter-over-quarter. The increase in share-based compensation expenses year-over-year was primarily attributed to additional options and restricted shares granted. Net loss in the third quarter was CNY 835.3 million, or $129.6 million, representing a decrease of 20.2% year-over-year, an increase of 42.3% quarter-over-quarter.
Net loss attributable to NIO's ordinary shareholders in the third quarter was CNY 2.86 billion or $443.7 million, representing an increase of 140.7% year-over-year, an increase of 333.6% quarter-over-quarter. In the third quarter of 2021, NIO repurchased 1.418% equity interest in NIO China from a minority strategic investor for total consideration of CNY 2.5 billion and recorded an amount of CNY 2.02 billion in accretion on redeemable non-controlling interest to redemption value. Basic and diluted net loss per ADS in the third quarter were both 1.82 CNY or $0.28 per ADS.
Excluding share-based compensation expenses and accretion on redeemable non-controlling interest to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both CNY 0.36 or $0.06 per ADS. Our cash and cash equivalents, restricted cash and short-term investments were CNY 47 billion or $10.3 billion as of September 30, 2021. Now for our business outlook. As William mentioned, for the fourth quarter of 2021, the company expects deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4%-46.9% from the same quarter of 2020, and a decrease of approximately 3.8% to an increase of approximately 4.3% from the third quarter of 2021.
The company also expects the total revenues of the fourth quarter 2021 to be between CNY 9.38 billion and CNY 10.11 billion, representing an increase of approximately 41.2%- 52.2% from the same quarter of 2020, and a decrease of approximately 4.4% to increase of approximately 3.1% from the third 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.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, press star one on your telephone. To cancel a request, press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. You can re-enter the queue. Your first question comes from Tim Hsiao of Morgan Stanley. Please ask your question.
Hi, William Li, Steven Feng, and Tim Hsiao. Thanks for taking my question. It's great to see NIO manage to navigate through the component crunch and production hiccup in first half. Just two quick questions from my side. The first one, we've seen restructuring and upgrade of the production lines cause around two rounds of disruption to our delivery and production this year. Just wanted to confirm that if we've completed all the necessary restructuring for the three new models next year, or should we expect any similar disruptions on time next year? My second question is about the details of the other sales. Could you share more information about NIO's third quarter other sales because it has been surging quite a lot.
I think a more significant revenue increase was attributable to the sales of EV credits and the battery upgrade services. Could we have the further breakdowns regarding the contribution from those items and what could be the scales of the contribution into fourth quarter? Because if you look at the current fourth quarter revenue guidance, it seems that it just merely reflect the contribution from the vehicle sales. Should we expect the contribution from other sales to rise further? Those are my two questions. Thank you.
Tim.
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Tim, thank you for your question. I will answer the first one, and Stanley is going to answer the second one. In the previous remarks we have also talked about the progress of a capacity expansion for the two plants. For the first plant, just like you mentioned, starting from the end of September to the middle of October, we have done a restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new product introduction. Following this upgrade, we probably will do some minor restructurings and modifications of the production lines. We believe the following restructuring is not going to have a very significant impact on the normal production of the vehicles.
Secondly, regarding the new products, some of the new products will be manufactured in the second plant. This means that for the second plant, we will need some time to ramp up the production for the new products, but this is not going to affect the manufacturing of the existing products.
Hi, Tim. Regarding the second question, among the other revenue, CNY 570 million was contributed by the NEV credit sales. After deduction of this NEV credit sales, our total gross margin for other revenue decreased from -5.6%- 12.6%. That's because it's driven by the expansion of our sales and service network in Q3. As mentioned by William in his explanation, the construction of our sales and service network infrastructure move early and faster than our sales increase, especially in this year.
We are expecting the total revenue of other service will increase, but the gross profit margin for this part will decrease a little bit in Q4. Yeah.
Okay.
Okay, great. Sorry, just a quick follow-up. Could you highlight some potential contribution from the sales of credits to the fourth quarter?
Almost majority of the NEV credit sales was realized in Q3. In Q4, we don't expect a significant revenue from this part.
Got it. Great. Thank you.
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Yes. Just like Stanley explained, this year is a bit different from last year. We recognized the sales of the regulatory credits much earlier compared with last year.
Thank you, William.
Your next question comes from Nick Lai of JP Morgan. Please ask the question.
Thank you. My question as Nick from JP Morgan. Good morning, William and Steven. My two simple question is number one related to margin, and the second question is related to ET7, the new exciting model. First of all, on the margin front, at the vehicle margin, full quarter was 18%, slightly down from 20% in Q2. I mean, I wonder how should we think about the margin into full Q or first half next year, taking into account of two factors. The first factor is the pricing dynamic or competition from the peers. And the second is raw material prices especially on the battery front. That's the first question. And the...
I mean, I think you answered part of my question earlier on the credit sales. Second question on ET7 is certainly a very exciting product. When should we expect the car to hit a showroom in the near term? In the medium to longer term after production ramps up, how should we think about the volume and the possibility of ET7 relative to our current high-end product, ES8? ES8's current monthly run rate sales volume is roughly about 1,500. How should we think about the profit margin and the volume for ET7? That's two simple questions. Thank you.
Okay. Hi, Nick. This is Stanley. About your first question regarding the gross profit margin. Our 75 kWh battery will start to be delivered from November. Gross profit margin will be improved a little bit compared with 70 kWh battery. Prices of our key materials like aluminum, copper and also chips are increasing. There will be pressures for our cost control. We are confident to continuously improve our gross profit margin with combined efforts either from the product design or supply chain optimization.
For Q4, we are expecting the gross profit margin will keep stable. For next year, our target is to achieve 20% gross profit margin for vehicles. Along with our launch of NT2 products, from a long run perspective, we try to achieve a higher profit margin with about 25%, yeah, for vehicles. Okay.
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As Stanley mentioned, basically for the NT2 product, we expect that with the economies of scale and the volume ramp-up as well as the optimizations in every aspect, we should be able to reach 25% vehicle gross margin in the long run. At the beginning, of course, we will need some time to ramp up the production of the new products based on the new technology platform 2.0. According to our preliminary estimation internally, we believe the vehicle gross margin of the new product should be quite good.
For the ET7 delivery, we are going to start the delivery of ET7 in the first quarter of next year, so it means that we will have the cars in our new houses and the new spaces around the Spring Festival's time. Afterwards, we will start the deliveries to the users. Because we have used many advanced chips and sensors on the ET7, so this has put a lot of pressure on the mass production of ET7, but we believe everything is on schedule.
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Thank you, Nick.
Your next question comes from Ming-Hsun Lee of Bank of America Securities. Please ask your question.
Thank you, good morning, William, Steven and Stanley. My question is regarding your supply chain. Right now, literally we are hearing some of the auto company expect the chip shortage situation will not be fully resolved by the middle of next year. Right now I want to hear your latest view regarding your chip supply situation, and also the large size battery pack supply situation. Also right now for your consumers, if they place orders to you, I think the waiting time is more than two months already. How will you retain those consumers?
Also next year we expect the EV purchase subsidy to be cut further. In this case, if the consumer places the order before the year end, but they need to, we need to deliver the car, after, I think in next year. Will we continue to give them a similar subsidy amount, so we absorb the subsidy cut? Yeah, this is my question. Thank you.
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Thank you, Ming, for the question. Regarding the chip shortage situation, we believe right now is much better than the situation in Q3. But the challenge is still quite big because it's very difficult for us to forecast what is going to happen for the chip supply. I think everyone knows about the STMicroelectronics situation in Malaysia, and the situation basically is improving right now. The good thing is our teams have learned to adapt to the situation and face the challenges head on, and we have always been able to find a solution to all those challenges. On the other hand, our volume compared to the mature OEMs is still relatively small, so the challenges for us is smaller compared to the mature OEMs.
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I would like to specifically mention that because the many domain controllers in our vehicles are actually developed by ourselves in house. If there is a shortage of certain chips in the domain controllers, our teams have the capability to quickly find the alternatives and do the rapid validation and faster production of the vehicles and the chips. Because of these capabilities, we have already resolved some chip shortages situations happened to our vehicles. For the 75 kWh battery pack, we announced this in September, but we will gradually start the delivery of the 75 kWh battery pack in late November.
We also need some time to ramp up the production of the new battery pack, and we believe the production is going to reach a reasonable level to the first quarter of next year. The battery is actually a very big constraint for us. CATL is our partner on the battery side. They have invested a lot to help us and support our vehicle production. We believe the battery is still the main constraint on the overall production and supply capacity.
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Yes, as I mentioned, if you place the order right now, you will need to wait for some time to get the cars delivered. Recently we have also announced some policies regarding the subsidy reduction for the next year to keep our customers during this long waiting time. For example, we will provide a new credit or new points to the users during this waiting time, and this kind of incentives have helped us in the past. For example, starting from 2018, we have already got those policies in place, and we believe this is not going to affect the users regarding the waiting time.
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Regarding the EV subsidy, we believe this is not going to have a significant impact on us, because our average selling price is actually quite high regarding our products. Even considering the subsidy is not going to be a very big amount comparing to the selling price of the vehicles.
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Thank you.
Your next question comes from Bin Wang of Credit Suisse. Please ask a question.
Thank you for taking my question. I got two one, and the first one is about a potential IPO, because one of the key concerns that NIO seems to be the only one still just listed in the U.S. And also some of the media report is because of the NIO User Trust. Can you explain a little bit why the NIO User Trust could be one of the reason we then come back to Hong Kong IPO. That is the first question. The second thing is about the gross margin. Actually, you mentioned one of the reasons, because auto finance lead to the margin decline. However, you've seen the demand has been very good and short of supply. I'm quite just curious why we in a very tight supply, we still increase the auto finance lead to the falling margin.
Theoretically should reduce the auto finance, right? Also, some of my friends tell me that you actually may remove or reduce the auto finance in the fourth quarter. Can I confirm this is the case? If this is the case, can I assume the gross margin will have increased in the fourth quarter compared to third because you don't provide auto finance anymore? The average ASP also will increase because auto finance seems to be one of the reason for the ASP decline in the third quarter compared to second quarter. Thank you.
Bin Wang, this is Steven Feng. Thank you for your question. I would like with regard to your first question, I have two comments. First, we are open-minded. We closely monitor the market, and we'll make the right choice in the best interest of our shareholders. Second, we actually explore the possibilities to get listed in Hong Kong market. We are doing what is necessary to evaluate and communicate.
Yeah.
Thank you.
Your next question comes from Edison Yu of Deutsche Bank. Please ask your question.
Hi everyone. Thank you for taking our questions. First question is on the ET7 ADS capabilities. Could you maybe discuss what kind of features we could expect at launch? If you can't reveal that right now, would you expect to do any sort of demonstrations on the road, in the coming months, similar to what, you know, other competitors have done? The second question, more longer-term. You know, last year at NIO Day, you kind of teased a solid state battery or a hybrid solid state battery, coming to the vehicles, I believe at the end of next year. Is there any update on this? Is this still on track? Any details you could provide there? That'd be great. Thank you.
Edison, welcome to the NAD.
Thank you.
Thank you, Edison.
Your next question comes from Jeff Chung of Citi. Please ask the question.
Hey. Hi, William, Steven. I got three questions. Number one, what kind of annualized total volume production from the NT2 platform should lead to the 25% GP margin according to your guidance? Secondly, second question is, apart from the three brand new products launching 2022, how likely are we going to launch the facelift version of the existing product, the ES8, ES6 and EC6? How likely we are going to launch six new products next year instead of three brand new products? Finally, the NEV credit. Could you guide us how many points we sold in the third quarter? From which we can activate the ASP and the credit compared with the previous quarters? Thank you, William.
Thank you, Steven.
Jeff, with regard to your first question about GP margin, our 25% GP margin for NT2 platform, it's based on the annual production volume of 300,000 units per year.
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Just like Steven mentioned that our plan is if we can achieve an annual production of 300,000 units, we should be able to reach 25% vehicle gross margin on the new technology platform 2.0. We are very confident to achieve these targets. For the existing products, of course, we have a plan to upgrade our products to the new technology platform 2.0. We believe that this is very important for the company, and we will need to focus on managing the schedule for the product upgrade in specific details. Internally, we have already kicked off the development work with regard to how we should upgrade the different products to the new technology platform 2.0.
Yeah. About the NEV credits, totally around 200,000 points were sold in Q3. I want to remind is the price volatility for NEV credit is also high along with the China's NEV penetration increase recently. I hope this can help you to build the expectation for our futures in your credit revenue. Yeah.
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This year, basically we believe the number of the credits we receive will increase. This year the penetration rate of the NEV has increased very rapidly. This probably is going to change the situation for next year regarding the regulatory credit sales. According to my personal estimation, I think, considering all those factors, the price of the NEV credit is going to be different or probably going to be lower compared with this year's price.
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Your next question comes from Paul Gong of UBS. Please ask a question.
Yeah, hi, thanks guys. I have two questions. The first one is regarding the Norway operation. Obviously it has been more than one month, and you just briefly mentioned 92% of the users choose BaaS, and the orders have been exceeding your expectations. Can you give us more color, like how is it exceeding expectations there? And what are the challenges over there? Obviously it's a rich country, but the labor cost might also be much higher than in China. What can you share with us? And after Norway, what is your next destination for the overseas operation?
The second question is regarding your expenses spending. It seems that this quarter the increase in SG&A has been a bit faster than expected, while the R&D increase has been a little bit slower than expected. What is the key rationale behind and key reasons behind? Given you have so many orders undelivered because of the supply chain disruption. Will you consider slowing down a little bit of the SG&A, and instead put more budget into the R&D in the following one or two quarters? [Foreign language]
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Thank you for your question. Regarding our operations in Norway, we believe the basic operations have met our expectations in all aspects after the NIO House opened on September 30. I would like to share with you some data after the test drive for one fourth of the users have placed the orders for our products. We believe this is very impressive. This shows basically the efficiency is much higher compared with that of here in China. This is on the delivery side. On the service side, so we still need a lot of work to do. Our swap stations in Norway have just started the operation because previously we need to send people over to work on the installation and on the commissioning of the swap stations.
For the after sales, we also encountered some challenges brought forward by the COVID situation. The order momentum is quite strong. We have done some trial delivery at the end of September and in October. We believe that the delivery in November is going to improve significantly. There's a lot of order backlog, but we would like to control our pace of delivery a little bit at the beginning, because internally, we set the target for ourselves, especially on the user satisfaction rate. We have a kind of VAU is a vision action upgrade based in the company, and basically we use the VAU to set the target for ourselves.
My personal VAU is to make sure we can achieve high user satisfaction rates. Right now, according to the feedback we got from the ground in Norway, we understand that word of mouth reputation has been quite good, and one of my friends actually sent a video to me to show that there are a lot of visitors in the NIO House. I'm very happy to see this video and to see so many people in our NIO House in Norway. We will continue to make a decisive investment on the service and on other aspects, and we will do this step by step.
Next year, besides Norway, we are going to enter an additional five countries in Europe. For this product planning of all those European countries, basically the ES8 based on the new technology platform 1.0 will only be sold in Norway. For the other non-Norway countries we are going to enter, we will only sell the products based on the new technology platform 2.0.
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I believe for the investment questions, this is more about the long term competitiveness or the long term strategy of the company. In China, the competition is becoming more fierce because there have been many new entrants into the smart EV industry. We believe the product development, technology development, the sales service network infrastructure including swapping and charging network are part of the long-term competitiveness of the company. That is why we double down on our investment in all those regards in 2021. In 2022, we will continue to make a decisive investment on those aspects.
We believe the infrastructure like the swapping and charging network, the sales service network are also part of the long-term competitiveness of the company. Maybe in the third quarter of this year, the investment on those aspects ramped up a little bit faster than expected. That is why we can see the SG&A cost increased higher than the previous expectation. But on the R&D side, we have also doubled our R&D personnel this year and we have been working on many new products and the new technologies. But for all those new products and the technologies, it will need some time to ramp up all the pace. In the fourth quarter, we will be able to see some R&D expenses and cost increase in this regard.
You can imagine internally right now we have multiple new products and new projects working in parallel, then probably at the beginning when we set up those projects, the cost is not going to be that high and it will need some time to reflect all those R&D investments on our balance sheet or PNL. At the beginning is relatively small, but gradually along with the project, this cost is going to increase. But we believe the product and technology should be the cornerstone of the company's long-term competitiveness, and that's why we will continue to make decisive investment on those regards.
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Thank you very much. Xie xie.
Your next question comes from Jing Chang of CICC. Please ask your question.
Thank you for taking my questions. My first question is regarding the capacity expansion. Could you give us a guidance on next year's sales volume, especially for the new three models and also our current three models? Can our capacity meet the need in next year? Considering the strong EV demand on our new, more new models in 2023, do we have a plan in constructing more new plants? My second question is regarding the upgrade of smart hardware, because we are expecting a really fast upgrade in the smart hardware in next year. How do we keep our competitiveness of our next models and to keep our users satisfied?
Also, I have a follow-up question for our globalization. In longer term, do we have a guidance for the proportion of overseas sales account for the of our all sales? Thank you.
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Thank you, Chang Liu, for your question. Right now we have basically two plants, the first plant like I mention that we have upgraded the manufacturing lines to further expand the production capacity. For the new plant we are going to start the production in the third quarter of next year. For other products and operations, we believe these two plants should be able to support our demand for the short term. If we combine these two plants together, the maximum production capacity we can support is up to 600,000 annual production capacity based on double shifts. We believe this maximum production capacity should be able to satisfy our demand in the short term.
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For the new technology platform 1.0 smart hardware upgrade. We previously communicated with our users that we will study some plans to upgrade the hardware on the new technology platform 1.0 based on our design on the new technology platform 2.0. We plan to probably provide the services starting from next year, and we will provide some more details and updates in this regard at a more suitable time. Of course, this smart hardware upgrade on the new technology platform 1.0 is not going to be the same as the kind of experience of the new technology platform 2.0.
But we believe the digital cockpit of the existing product is going to significantly improve. We have already considered all those flexibilities and possibilities of the hardware and software upgrade in our product design. For example, just now I mentioned about the hardware upgrades and then for the software aspect we have been continuously upgrading our software. We launched and released Aspen 3.0 to our users of the existing products and received great reviews and feedback from all those users. We will continue to upgrade to offer software and iterate on software to make sure we can provide much better services and experiences to our users.
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Regarding the previous Aspen 3.0, we also believe this provides a solid foundation for our global market entry. If we go back to your question about the global market entry and the target for the global markets, NIO has always aspired to build a global brand. If we look at the global market, we can see that China is still the biggest auto market and the biggest premium market. China will still be the most important market for us. Regarding our aspiration for the global markets, I cannot provide a very specific target for the global markets at this moment. I believe for the markets outside of China in the long term, they should account for around 50% of all sales of our product.
Yeah, thank you William.
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As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.
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.