Hello, ladies and gentlemen, thank you for standing by for NIO Inc.'s fourth quarter and full year of 2019 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, Mr. Rui Chen, Director of Investor Relations of the company. Please go ahead, Rui.
Good evening and good morning, everyone. Welcome to NIO's fourth quarter and full year 2019 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, Ms. Steven Feng, Chief Financial Officer, Ms. Stanley Qu, VP of Finance, and Ms. Jade Wei, AVP of Investor Relations. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.
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 the 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, go ahead, please.
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Hello, everyone, and thank you for joining our 2019 Q4 earnings call today.
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We delivered a combined 8,224 ES8 and ES6 vehicles in the fourth quarter of 2019, representing a 71% sequential increase from the prior quarter. Cumulative deliveries of ES8 and ES6 reached 20,565 in 2019, representing an 81% increase from 2018.
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The COVID-19 has broken out in China since January 2020. The overall sales and deliveries of the auto industry in China are materially impacted. The passenger vehicle sales in China dropped 41% in total in January and February 2020 compared to the same period last year. Against this backdrop, NIO has delivered a total of 2,305 vehicles in January and February, which is lower than our target prior to the outbreak.
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In response to the microenvironment, on one hand, we have actively explored a variety of online channels, including live streaming platforms, and fully leveraged the well-developed online functions of NIO App to promote online sales. NIO's end-to-end direct sales business process has enabled us to continue our sales efforts during this special time. On the other hand, from Spring Festival to now, NIO has maintained 24/7 maintenance and power services through our cloud-based service system to support users' daily usage. Our products and service system have withstood the arduous test during the outbreak and won wide recognition of our user community.
Thanks to our loyal user community and superior word-of-mouth reputation, recently, orders generated through user referral have reached 69%, much higher than the 45% average user referral rate in 2019。
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With the joint efforts of our users and teams, the total number of new production orders reached over 2,100 in the past 30 days, representing 70% of the order growth level in December 2019. As the outbreak gradually brought under control in China, NIO Houses and NIO Spaces are cautiously being reopened with increasing foot traffic in stores. Based on the current trend, we would hope the daily new order rate to return to the level of last December in April.
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In terms of production, the work resumption has been postponed across China, which has impacted our production and supply chain to various extents. Although our Hefei plant resumed the production on February 10th, and the production of most of our supply chain partners has basically returned to normal, partners located in Hubei province will still need some time to recover. Constrained by the limited supply capacity, we expect the aggregate deliveries of Q1 2020 to be around 3,400-3,600. We have been monitoring the supply chain very closely and have seen positive changes every day. We do see the supply chain recovery has speeded up since the middle of March, so we hope that the production capacity can return to normal in April.
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In the first quarter, the safety of our employees and users remained our top priority. Thanks to the efforts of our users and teams, we have weathered the storm and passed the toughest time. In particular, thousands of NIO users joined various public benefit activities during the outbreak and made contributions to the prevention and control initiatives in Hubei and other regions. Looking forward to 2020, there are many challenges facing China and the global economy, which is bound to significantly affect the overall auto industry in China. We believe that NIO will stand out from the competition in this difficult market environment. We are confident about our product competitiveness, integrated online and offline operations, and innovative business model based on user enterprise.
After the organizational adjustments and the efficiency improvements in 2019, our teams are well prepared to achieve the 2020 sales target, continuously improve gross margins and systematically optimize the overall operational efficiency.
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First, facing the pressure of the outbreak, we are still confident to achieve the preset sales target for 2020. NIO's product family will be more competitive and diverse in 2020. In April, NIO will start the delivery of the all new ES8, a smart electric flagship SUV. The all new ES8 has made nearly 188 improvements, and most importantly, the NEDC range will be greatly improved. In September, we will kick off the delivery of the EC6, a smart electric coupe SUV. In the fourth quarter, our 100 kilowatt-hour battery pack will be launched to the market. The iterative product experience is the most important cornerstone for NIO to maintain our leading position in the premium smart electric SUV market in China. In addition, we'll continue our efforts in sales network expansion and build more NIO Spaces, which are estimated to be around 200 by the end of this year.
User referral is another important driver of sales growth. With the growing user base and industry-leading word-of-mouth reputation, we believe that the orders generated from user referrals will increase at an even faster rate in the future.
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Second, gross margin improvement is one of the top objectives of NIO in 2020. With the supply chain optimization, continuous cost reduction of battery pack, and manufacturing cost saving per vehicle brought forward by production scaling up and management optimization, we have confidence to achieve our goals that our gross margin can turn positive in the second quarter and reach two digits by the end of the year.
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Third, we'll continuously improve operational efficiency. We have made significant organizational optimization and business adjustment in 2019. The overall headcount has reduced from close to 10,000 at the beginning of 2019 to less than 7,000. Due to one-off expenses in Q4, the operating loss in the fourth quarter of 2019 was higher than that of the third quarter. We have basically finished all the adjustments, which has laid a solid foundation for 2020. In 2020, the company has set up very strict expense control and efficiency improvement targets, and implemented rigorous measures in daily operations accordingly. We are pleased to see encouraging results year to date, and expect around 35% expense reduction compared to the prior quarter, even under the pressure of the outbreak.
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Lastly, with regards to the financing efforts, NIO issued $435 million convertible notes in February and March to several unaffiliated Asia-based investment funds to support the company's daily operations and business development. At this moment, we have already finished all the private placement.
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On February 26th, we signed the collaboration framework agreement with Hefei Municipal Government. The JV new manufacturing plant for ES8, ES6, and EC6 is located in Hefei, which enjoys a strong automotive and digital legacy and resources, and is one of the core cities and transportation hubs in the Yangtze River Delta Economic Zone. Under this framework agreement-NIO plans to establish NIO China headquarters in Hefei, and Hefei government plans to provide resources and funding support for the long-term growth of NIO China. Both parties expect to sign the definitive agreement before the end of April.
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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. I will now go over our key financial results for the fourth quarter of 2019. As we're mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for our full year results and other additional details. Our total revenues in the fourth quarter were RMB 2.85 billion, or $409.1 million, representing an increase of 55.1% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the fourth quarter were RMB 2.68 billion or $385.5 million, representing an increase of 54.8% quarter-over-quarter, and accounted for 94% of total revenues in this quarter.
The increase in vehicle sales quarter-over-quarter was attributed to higher deliveries achieved from our existing user referrals and the expansion of our sales network through the continued launch of NIO Spaces in the fourth quarter of 2019. Other sales in the fourth quarter were RMB 164.4 million or $23.6 million, representing an increase of 59.0% quarter-over-quarter. The increase in other sales over last quarter was mainly attributed to the increase of home chargers installed and accessories sold, which was in line with improvement of vehicle sales in the fourth quarter. Cost of sales in the fourth quarter was RMB 3.10 billion or $445.6 million, representing an increase of 50.7% quarter-over-quarter. The increase in cost of sales was mainly driven by the increase of delivery volume of the ES6 and ES8.
Gross margin in the fourth quarter was negative 8.9%, compared with - 12.1% in the third quarter of 2019. The improvement in gross margin over last quarter was mainly driven by the improvement of vehicle margin. More specifically, vehicle margin in the fourth quarter was - 6.0%, compared with - 6.8% in the third quarter of 2019. The improvement of vehicle margin was mainly due to improved efficiency driven by the increase of production and delivered volume of ES6 and ES8. R&D expenses in the fourth quarter were RMB 1.03 billion, representing a decrease of 32.3% year-over-year, and increase of 0.3% quarter-over-quarter. The slight increase in R&D expenses over last quarter was primarily attributed to the incremental design and development costs for EC6 and all new ES8 launched in December 2019, offset by less employee compensation due to a reduced number of R&D personnel.
SG&A expenses in the fourth quarter were RMB 1.55 billion, representing a decrease of 20.5% year-over-year and increase of 32.8% quarter-over-quarter. The increase in SG&A expenses over last quarter was primarily attributed to increased marketing and promotion activities and additional costs on the optimization of our organization and sales network, offset by less employee compensation due to a reduced number of selling, general, and administrative employees. Loss from operations in the fourth quarter was RMB 2.83 billion, representing a decrease of 18.0% year-over-year and increase of 17.3% quarter-over-quarter. Share-based compensation expenses in the fourth quarter were RMB 51.2 million, representing a decrease of 63.9% year-over-year and a decrease of 27.3% quarter-over-quarter.
The decrease in share-based compensation expenses over last quarter was primarily attributed to the continuous decline of employee numbers and the impact of part of the share-based compensation expenses being recognized using the acceleration method, under which the expense decrease gradually over the vesting period. Net loss was RMB 2.86 billion in the fourth quarter, representing a decrease of 18.2% year-over-year, and an increase of 7.6% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in this quarter was RMB 2.89 billion, representing a decrease of 17.7% year-over-year, an increase of 7.3% quarter-over-quarter. Basic and diluted net loss per ADS in the fourth quarter were both RMB 2.81 or $0.40 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 RMB 2.73 or $0.39 per ADS in the fourth quarter.
Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 1.06 billion as of December 31st, 2019. Now for business outlook. As William mentioned, for the first quarter of 2020, the company expects deliveries to be between 3,400 and 3,600 vehicles, representing a decrease of approximately 56.2%-58.7% from the fourth quarter of 2019. The expected decrease is primarily attributed to the constrained production and delivery impacted by the novel coronavirus outbreak. The company also expects the total revenue of the first quarter 2020 to be between RMB 1.21 billion to RMB 1.27 billion or between $173 million to $183 million . This would represent a decrease of approximately 35.3%-57.6% from the fourth quarter of 2019.
This business outlook reflects the company's current and preliminary view on the business situation and market condition, which is subject to change. This concludes our prepared remarks.
I will now turn the call over to the operator for facilitate our Q&A session.
Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. For your questions, please press star one on your telephones and wait for your name to be announced. To cancel the request, it is the pound or hash key. Once again, for your questions, please press star one on your telephones and wait for your name to be announced. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. First question comes from the line of Lei Wang of CICC. Please go ahead.
Good evening, William and Steven. This is Lei Wang speaking from CICC. Congratulations on the recent financing activities. I do believe that means a lot. I got two questions. In the business outlook, it guides a quarterly delivery between 3,400-3,600 in the first quarter of 2020. Do you mind providing some guidance on the sales target over this year? Would that be something close to 30,000 units? That's the first question.
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Thanks for your question. In our previous remarks, we have provided the guidance for Q1, that is 3,400 to 3,600. Just like we mentioned, this is mainly affected by the production capacity. Although our Hefei plant has resumed production on February 10th, the production capacity is still limited by the supply capacity, especially for those partners located in Hubei province for the February and March deliveries. At this moment, most of the partners have resumed their production, but we still have some limitations and constraints regarding the parts supply. For the partners in Hubei, they will still need some time to recover. The main challenge for the delivery in January is because of the production constraints.
After we produce other products, we will need to ship other products to the delivery centers and also make the appointments with our users to deliver the product to them. For the first quarter delivery, the main reason of the constraint is because of the production. Just like I mentioned, in the past 30 days, our orders have increased, and right now the new orders have accumulated for over 2,100 or close to 2,200. It means that the daily new orders is around 70. For the level, it's actually quite similar or actually close to the 70% of the December level last year. At this moment, we're seeing the orders is ramping up, so we're quite confident about our annual sales target.
Because our model is made to order, so if we can resume the normal production, then it means that we can deliver other products to the users at a much faster rate. Every day, we have accumulated some new orders from the users, and at this moment, we have around 5,000 order backlogs. I cannot give you a specific number regarding our annual sales target, but according to all the data that I have shared, we're quite confident to achieve our internal annual sales target.
Your next question.
Once again, for Mr. Lei Wang, please press star one for your second question.
Hi, operator. We think that Lei was dropped. Please continue with next analyst, please. Thank you.
All right, sure. Thank you. Next question is from the line of Mr. Dan Galves of Wolfe Research. Please go ahead.
Thank you very much for taking my questions. Volume was much higher in Q4 versus Q3, but the gross margin only improved a small amount. Can you talk about some of the things that maybe offset the impact of better scale?
Yes, Stanley, please.
Yes.
Next question.
Sorry. This is Stanley. As you mentioned, the volume increased in the fourth quarter, but the gross margin slightly increased. The main reason is about the volume mix of our products. We sold more ES6 base version in the fourth quarter. The selling price is a little bit lower than the ES8. That's the main reason for the gross margin slight increase in the fourth quarter.
Yeah.
Okay.
Okay. That makes sense. As you're looking ahead, I think that you said that you're expecting double-digit gross margin by the end of the year, but maybe you could clarify that comment. Can you give us a sense of what volume level that would require to get to that double-digit gross margin target? If you can achieve that, would that support a cash outflow of neutral, or do you think that there would still be a cash outflow once you get to double-digit margins on the vehicles? Thank you.
Okay. Yes, as William mentioned in his speech, and the gross margin improvement in 2020 is mainly because our supply chain optimization and continuous cost reduction of that battery pack, and also manufacturing cost saving brought forward by production scaling up and management optimization. We have confidence that we can achieve this in 2020. Regarding the volume, and also we mentioned before, we have clear target, but it's difficult for us to mention this volume scale here for you. We are confident to achieve this target. Yeah.
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I just want to add one point. In terms of the production capacity of the Hefei plant, we think the best economy of scale should be around the 4,000 per month for one shift.
Not best. Just Dan.
One shift.
One shift production. The one shift production should be around 4,000 per month. If we can get to this, then probably this can basically support our operation target. We believe that for this year, we should have some opportunities to achieve this.
Then perhaps some comments from Steven. If you look at our GP margin, it's related with several parameters. Of course, first, volume. Second, that's our price. Third, our cost. Of course, we don't change our sales target for 2020, and we're very confident we can achieve this sales target, although the outbreak of novel coronavirus in January and February. If we look at our sales price, we think, and we're confident we are able to raise the ASP as more attractive options, such as NIO Pilot. Also, if you look at our cost side, of course, the battery cost will anyway decline. If we look at our other BOM cost, that's the other parts from other suppliers. We believe a 10% decrease is reasonable. Third, if you look at our previous accounting records, we actually compensate the JAC NIO plant.
That means with the production volume to rise, our manufacturing expenses will gradually drop, decline, and we expect that to achieve like 30% decline this year just from its manufacturing cost. Yeah.
That's very helpful. Thanks a lot.
Thank you.
Thank you. Our next question is from the line of Tim Hsiao of Morgan Stanley. Please go ahead.
Hi, William, Steven and management team. Thanks for taking time to host the call. Just a few quick question. First of all, could I just have a quick follow-up question regarding the gross margin? Because you just mentioned about the several product mix. Could we have a little bit more color about the gross margin of EC6, the model launch in the upcoming September? Would that be similar to ES6 or ES8, or could be slightly higher, or similar, or lower? Separately, we noticed that the selling and marketing expenses rose a bit in fourth quarter last year sequentially. Could we expect that to become the norm or further trend up considering that we target to open up to 200 stores, I mean, NIO Space, by end of this year?
Lastly, is our collaboration agreement binding on Hefei government before the deal is officially signed by end of April? Will the collaboration or potential investment take place at our China arm or at the listed company level? Thank you.
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Thanks for your question. Because we haven't disclosed or announced the specific pricing of the EC6. Our EC6 is actually benchmarked against Model Y. We launched the EC6 at the end of last year, and we received very positive feedback from the public and our users. We will determine the specific pricing of the EC6 based on the market situation. We think it probably will announce the specific pricing around July. Gross margin is a very important objective for the company, just like I mentioned in my speech. EC6 has shared many components together with ES6. At the same time, EC6 battery cost can be significantly reduced. In terms of the unit cost per watt hours in this Q4 will be reduced by 25% compared with the same period last year.
With all those factors in consideration, we are quite confident about achieving the growth margin target for the EC6 regardless of the pricing. Just like we have mentioned, NIO Space started from, actually, last year Q4. The main cooperation model for the NIO Space is to work together with other partners to set up and expand the NIO Spaces in the market. We work together with the partner based on the orders or the specific transactions that they can achieve in their store. This transaction is based on the offline traffic and the orders that they can settle in their own NIO Spaces. Overall speaking, the NIO Space model is quite efficient and is different from the NIO Houses. We're not going to increase the number of the NIO Houses this year.
We believe the NIO Space will not have a significant impact on our SG&A, and the efficiency of the NIO Space is actually quite high. Under the collaboration framework agreement with the Hefei municipal government, NIO China is an independent entity for the RMB financing activities. The Hefei municipal government will support the NIO China's long-term growth through the RMB financing projects. It's not part of the NIO Inc. equity financing project. We haven't signed the definitive agreement yet with the municipal government. After we sign the final agreement, we will disclose the specific details.
Thank you.
Thank you.
Thank you. Thank you. Our next question is from the line of Ryan Brinkman of JP Morgan. Please go ahead.
My question. Thanks for taking my question. I'm just curious how you are thinking about the likely sales or pricing outlook for battery electric vehicles, including for your vehicles, relative to internal combustion engine vehicles, in light of the almost unprecedented recent decline in the price of oil and presumably soon, gasoline. Thank you.
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Actually, today, the China government has adjusted the oil price and reduced this by 15%. The government will adjust this oil price based on the national oil price, but it will not go any lower than $40 because the crude oil price is set as $40. At this moment, the crude oil price in the international market is around $30. It means that the Chinese government will not have any space to reduce the price further. Based on the current price, the cost of EV usage is still much better than that of the combustion cars, so we think they will not have any significant changes regarding this cost of usage.
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I think it's the market consensus that in the long term, EV is going to replace combustion cars. The main reason for this trend is not because of the cost of usage.
It's mainly because the EV is better fitted for the autonomous driving technologies, and ADAS in terms of the response time of the motors. At the same time, the Chinese government is quite determined in terms of the emission reduction. For example, the government has released many favorable policies for the EVs in terms of the license plate and the tax reductions. Those are the main impetus for the users to choose EV over combustion cars.
Thank you.
Thank you.
Thank you. Once again, for those who wish to ask a question, please press star one on your telephones and wait for your name to be announced. To cancel the request, it is pound or hash key. It is star one to ask a question. Our next question is from the line of Bin Wang of Credit Suisse. Please go ahead.
Thank you. I actually want to clarify several numbers. Number one is about gross margin. It's the vehicle gross margin or it's the overall gross margin including vehicle? That's number 1, I want to clarify. The second thing is about one-off expense. Can you quantify how big is the size of a one-off expense and what's the detail about the expense? That's the second thing. The third thing is, actually you mentioned in the first quarter, the cost will decline by 35%, or another translation is that the loss-making.
in the number 1 quarter will decline by 35%. What's the base for the decline for 35% in the first quarter this year? That's the three things I want to clarify. Besides, actually, I have one question about financing because think about the share price right now. The CB actually have a potential risk to remain be tapped and not convert to the share. For upcoming, do you have any further financing after the Hefei, this could be a tie-up, any further financing plan? Actually, you can see in the media report, few of the automaker may actually join your investment such as the GAC, such as the JAC. Do you see any synergy if you really are a shareholder from the traditional carmaker? For example, you can share their supply chain and maybe the component supply with much lower cost. Thank you.
Okay. Perhaps, I want to start with the GP margin question. Yes, we think we will achieve positive GP margin for second quarter of 2020 and a double digit GP margin in Q4 of 2020. Of course, first we refer it as our vehicle GP margin. You can see because vehicle sales accounted for 94% of our total revenue. Our overall GP margin will be close to our vehicle GP margin at first. Second, if you look at our other sales GP margin, it also improved in Q4 2019, and we are confident that with our efforts, our other sales GP margin will also improve in 2020. That's first. I think Stanley will give you more explanation about the one-off, one-time cost.
Yeah. The second question is about the one-time off expense. The majority were related to organizational restructuring across all functions, facilitate leasing contract termination compensations, and also the strategy adjustment around the manufacturing and supply chain. That's the second question, yeah.
Total number.
Total number is around RMB 400 million. That's the second question. Third is about our forward looking about the net loss of the first quarter of 2020. The comparison is with the fourth quarter of 2019. Compared with the fourth quarter of 2019, we expect the first quarter of 2020 will decrease by 35%. It's on quarter-over-quarter comparison.
I understand. It's not the OPEX, it's the bottom line. It's about RMB 2.9 billion, decreased 35%. Is that true? It's not OPEX, it's the bottom line, not net loss.
Yeah, net loss. Yeah.
Okay.
Yeah, net loss. Confirmed, net loss. Yeah. The fourth question goes to William. Yeah.
Yeah. [Non-English content]
Yes.
Yes, we have been working together with other OEMs in various ways. For example, we have been working together with JAC in terms of the manufacturing, and we also have a very good collaboration with JAC in terms of the JAC NIO joint venture. Recently, both parties have decided to increase investment in this joint venture, and this joint venture is going to kick off the mass production of their vehicle models. We will continue this cooperation with those OEMs. Regarding other OEMs, we will continue to explore other possibilities to work with them in terms of the supply chain and R&D. In terms of the equity or capital aspect, we don't have any specific information that we can disclose at this stage. If we have any information that we would like to disclose, we will share that information as soon as possible.
Thank you.
Thank you, Andy.
Thank you. Thank you. Our next question is from the line of Lei Wang of CICC. Please go ahead.
Hi, William and Steven. This is Lei again. Sorry, I was disconnected and was not able to finish the last question. Do we have some guidance on what the CapEx is going to be this year? It was reported that we are about to invest in a new R&D center, and also the second manufacturing site.
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In terms of the CapEx for 2020, the majority will be used for the new product model launch. For example, the tooling required for the product launch. It is less than $200 million. In terms of the cooperation with the Hefei municipal government, after we signed the definitive agreement with the government, we are not going to invest to build the R&D center or the manufacturing base in the Hefei municipal city. This is not going to cause any pressure on our CapEx.
Okay, thanks, William. Very clear.
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Thank you.
Thank you. Our next question is from the line of Fei Fang of Goldman Sachs. Please go ahead. Hello, Fei Fang of Goldman Sachs. Your line is open. You can ask your question. All right, I'll release your line. Please press star one again. Thank you. Our next question is from the line of Paul Gong of UBS. Please go ahead.
Hi, William. Hi, Steven. Thanks for taking my question. Two questions. The first one is, I remember in the first quarter of last year, you have to prepay the battery purchase to CATL for the full year. Is it still the case heading into this year? This is my first question. My second question is regarding your assumption on the battery price declining throughout 2020. You mentioned that in Q4 of 2019, your battery cost is 20% cheaper than Q4 of 2018. In Q4 of 2019, you were still making negative gross margin despite of 8,000 delivery. When you mention by end of this year, you are going to achieve double digits gross profit margin, what further battery cost declining assumption are you using?
I think Steven mentioned 10% decrease on the other BOM costs, but I just want to have your assumption on the battery cost assumption for this. Thank you.
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Thanks for your question. Last year, due to the subsidy reduction, the passenger vehicle sales in China has slumped significantly. Because our users are private users, and for other OEMs, normally they sell their cars for the operating usage. In this case, our sales didn't decline that significant compared with the sales of other OEMs. That is why right now we are one of the most important partner with the CATL. This year, our collaboration with the CATL is going to be even closer. This means we can get a much better deal together with the CATL compared with last year. For example, in terms of the payment terms.
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In terms of the price, starting from one year and half ago, we have been working together with the CATL to reduce the price of the battery. This year, we have witnessed a significant cost reduction. Starting from the second quarter, we will have a continuous cost reduction every quarter. In the fourth quarter of this year, we will launch the 100 kWh battery pack and the C2P battery pack. With those new battery packs, we can further reduce the cost without affecting the performance and the drive range of our vehicle models. The unit cost per watt-hour is going to be reduced by 20% compared with last fourth quarter at the battery pack level. We're confident that we can improve the gross margin.
Just like we have mentioned, in terms of the gross margin improvement, the main drivers are the battery cost reduction, other BOM cost reduction, and the manufacturing cost saving. We're quite confident to see the positive result from those gross margin efforts.
Thank you very much.
Thank you.
Very helpful. Very glad to know that. Thank you.
Thank you.
Thank you. Once again, for those who wish to ask a question, it is star one on your telephones, and wait for your name to be announced. Our next question is from the line of Ming Li of Bank of America Merrill Lynch. Please go ahead.
Thank you. Thank you, William, and management team for your time. I just have a few quick questions. My first question is that right now, because the overall EV consumption sentiment is still not very strong in China, how do you think about any new strategy to help your volume sales? I know you talk about new products and also the NIO Space expansion, do you have any new strategy to have on the volume itself? That is my first question. Second question, some of your competitors already discussed to use LFP battery to lower the battery cost. Do you think it's a feasible choice for you since you have battery swap service and you have a lot of NCM battery for swap? Do you think it's a possible choice, or you don't think it's a good choice for you to lower your cost of battery?
That's my second question. My third question is that, what's the CapEx do you plan to spend on the battery swap and the battery charging station for this year? That's my third question. Thank you.
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Yes, it's a quite unique advantage for NIO in terms of the battery related innovations. This year we are going to launch a new concept called Battery as a Service. This is going to leverage the power swap stations and the swapping technologies we have. It's quite important to improve the overall system efficiency. In the world, only NIO can provide these kind of services to the users. Users can lease the battery or swap the battery and upgrade the battery according to their specific needs. Right now we have already launched the 84 kilowatt-hour battery pack to the users in our battery circulation system. The users are allowed to upgrade their battery packs with this 84 kWh battery.
In terms of the Battery as a Service, this is going to be a very important strategy for us to boost our sales, besides all the other strategies we have mentioned. We are now having very close discussions with the government authorities regarding the specific policies for the Battery as a Service. The current progress is quite positive. If there's any kind of important information that we will share with everyone right away.
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We have the swapping technology in place, we are quite willing to explore different technologies and materials for the battery packs. When we make these decisions, we will consider the performance, experience, and the cost. For example, we have the same battery pack size with different kind of energy density, like 100 kWh battery pack and 84 kWh battery pack. This year with the C2P technologies, we will be able to launch this 100 kWh battery pack. This is our unique advantage. This means that we should also be free to explore the possibilities in terms of the LFP material.
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In terms of the swap station and CapEx investment related with the battery, we will increase the investment a little bit this year because our user base is increasing, but overall speaking for this year, it's going to be around RMB 100 million.
Thank you.
Thank you, William.
Thank you. Once again, for those who wish to ask a question, press star one on your telephones and wait for your name to be announced. Our next question is from the line of Fei Fang of Goldman Sachs. Please go ahead.
Hey, great. Let me try my luck this time. Thanks, William, Steven, and Jade. Just two quick questions. Apologies if this have been covered before. For the first quarter volume guidance, is it possible to break it out by ES8 and ES6? The second question is that we noticed the net cash in the fourth quarter didn't really change much from the third quarter, despite we still have a RMB 2.8 billion loss. Can you maybe walk us through some of the major items in the cash flow statement? What has been sort of driving the better than sort of earnings free cash flow in the fourth quarter? Thank you.
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In terms of the sales for the first quarter, the majority of the sales are contributed by the ES6, because we are about to deliver the all-new ES8 in April. This means that the orders for the current ES8 is going to decrease, because people would like to place order for the all-new ES8. Our model is made to order, so this is quite unique for us because at the end of last year, we have launched the all-new ES8 and started to accept the orders from the public.
Okay. Regarding the second question about the cash flow of fourth quarter of 2019, first, we closely monitored our cash position in fourth quarter. Secondly, as we mentioned in our Q3 2019 earning release, William's CB was closed in the fourth quarter. There is still some cash injection in this quarter. Combined those effects, the total net cash outflow is a little bit lower than the total loss. That's the reason. Thank you.
Sorry, just want to confirm, the William CB was $100 million. That's the inflow, financing inflow in the fourth quarter.
Yeah. William subscribed totally RMB 100 million, and the majority came in in the fourth quarter, yeah.
That's great. Very helpful. Thank you.
Yeah.
Thank you. Are there no further questions? Now I'd like to turn the call back over to the company for closing remarks.
Thank you again for joining us today. If you have any questions, 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.
Thank you. Thank you, everyone. Thank you. Bye.
Thank you. Ladies and gentlemen, that concludes our conference for today, and thank you for participating. You may now all disconnect.