Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded and will last approximately one hour. I'll now turn the call over to your host, Ms. Jade Wei, Senior Director of Investor Relations of the company. Please go ahead, Jade.
Good evening and good morning, everyone. Thanks for joining NIO's second quarter 2019 earnings conference call. The company's financial and operating results were published in the press release yesterday and are posted on the company's IR website at ir.nio.com. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer, Mr. Louis Hsieh, our Chief Financial Officer, and Mr. Nick Wang, our 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 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 CFO, Louis Hsieh, for opening remarks. Louis, please.
Thank you, Jade, and good morning and good evening, everyone. Before we get started, I would like to take this opportunity to explain our decision to cancel the original call scheduled on September 24th and why we are having this call now. We have made significant positive progress in NIO China funding projects with certain parties. As you can imagine, we are in a very sensitive period during which we are not at liberty to disclose the confidential information related to those projects, which led us to initial decision to cancel the original call on September 24th. We believe the Q2 earnings release distributed yesterday provided a good update on the company's operations and financial performance. This is a very fast-moving and fluid situation with many advisors helping to navigate this period of time, and it has not been easy to find a path that is best for everyone.
After receiving numerous investor inquiries since the original call cancellation, we ultimately decided that resuming our original plan to hold the call provides more transparency and serves the interests of our investing community better. As it relates to the call, please understand that we will not be able to disclose any specific information or answer any questions regarding the NIO China funding projects today. We will disclose further information when the projects reach a stage that would subject us to a disclosure obligation. With this, I will turn the call over to William Li for our business highlights.
Thank you, Louis.
William.
Thanks to everyone for joining our call today. I will speak mainly in Chinese, and Ms. Eve Tang will interpret for me. 0:04:12
In the second quarter 2019, NIO delivered 3,553 vehicles, including 3,140 ES8, our six and seven-seater high-performance electric flagship SUV, and 413 ES6, our five-seater high-performance premium smart electric SUV, which commenced user deliveries in late June. In the third quarter, we expect to deliver between 4,200 and 4,400 vehicles, and bring our cumulative deliveries of ES8 and ES6 to over 23,000 by end of September to users in over 270 cities throughout China. As of today, o ver ES8 and ES6 users have driven more than 250 million kilometers. To support our users on the road, NIO Power has completed more than 200,000 charges through over one click for power services.
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We achieved our second quarter delivery results against the backdrop of four factors. First, continued overall weakness in the Chinese auto market, which saw a 14.3% drop in passenger vehicle wholesale sales from a year earlier. Second, fierce competitive discounting among premium auto brands with data showing that average selling price in this segment has dropped to 20%-25% compared to its peak levels. Third, electric vehicle subsidy reductions starting from late March and again in late June, which affected demand for electric vehicles. Lastly, slowing consumer discretionary spending as a result of macroeconomic uncertainties surrounding U.S.-China trade tensions.
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Despite the overall environment for the first eight months of 2019, sales of our ES8 ranked first in China's premium electric SUV market. ES8 was the only electric vehicle among the other nine ICE models in top 10 of the overall premium mid to large SUV market.
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We started the deliveries of our ES6 in late June. Since then, we have received broad-based positive reviews on the ES6 from both media and our users, particularly for its outstanding driving experience, extended driving range, and competitive design features. We have seen growth of our order backlog accelerating in the last 4 weeks as we started to roll out a more expanded sales network. More importantly, as more and more ES6 users act as our unofficial brand ambassadors and spread favorable word of mouth. From the production perspective, we will begin producing and delivering the ES6 standard version at a more competitive retail price at the end of September. In addition, starting in October, we will begin delivering the ES6 and ES8 with an 84 kilowatt-hour battery pack, extending their NEDC driving range to 510 kilometers and 430 kilometers respectively.
Going forward, we'll continue to enhance product competitiveness and strengthen sales by further advancing our software and autonomous driving technologies.
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We believe in the commitment to long-term competitiveness, supported by cutting-edge technologies, outstanding products, and excellent services. NIO continues to invest in leading technology and currently has filed over 4,200 patents. In Q2, our NIO Pilot has achieved a comprehensive level 2+ ADAS after version release and update. Furthermore, as of August, NIO and the ES8 both ranked first in brand and product quality according to research by J.D. Power on China's new energy vehicle user experience. Our users have given us an average rating of 4.9 out of 5, with hundreds of thousands satisfied customers. In response to these challenging market conditions, we are aggressive with expanding our sales efforts to accelerate orders, taking comprehensive measures to reduce our costs across the organization, and improve overall operational efficiency of the company. Louis will share more details on these initiatives later in the call.
Louis, please go ahead.
Thank you, William. Facing the challenges in China's auto industry, we are focusing our sales initiatives in three areas: creating retail points of sales called NIO Spaces, strengthening regionally driven promotions, and implementing commercial leasing options for corporate users and fleet operators. First, NIO Space. We are expanding our sales network through NIO-branded sales zones called NIO Spaces. NIO Spaces, which are normally less than 200 sq m, will allow us to quickly, cost-effectively, and meaningfully increase the number of sell points in the market. They will be primarily located in shopping centers and malls, communities with high traffic flow. The majority of the NIO Spaces will be invested by our selected partners. By the end of 2019, we aim to have established around 200 NIO Spaces in over 100 cities across China.
These will vastly expand our sales footprint throughout China, where more potential users can see, touch, feel, and drive, and truly enjoy the exhilarating ES6 and ES8 driving experiences. Second, we are significantly strengthening our sales approaches by encouraging more regionally driven promotions. In September, we introduced the free battery swapping policy, and it is attracting a large group of potential users to the cities with existing swapping stations. In Beijing, ICE vehicle users have opportunities to buy an ES8 or ES6 with extra incentives. In addition, we offer more than eight different auto financing programs with seven banks to our users, which significantly diversifies the solutions available to meet different users' cash needs. With these actions being implemented, we have seen order growth accelerating significantly since September, beginning of September. We are also driving sales through selling cars to corporate users and fleet operators.
Moreover, we have introduced a membership subscription program in which users have opportunities to rent and drive our products for one month or more to fully experience the product and services. In addition to these sales initiatives, we are implementing comprehensive cost control measures across the organization. These measures primarily focus on increasing efficiencies and streamlining operations within our sales and service network and our R&D functions, as well as reducing our headcount. First, our sales and service network. As mentioned previously, we are expanding our office's sales network by adding NIO Spaces. NIO Spaces are a costed way to implement significantly larger footprint in the markets and much less capital-intensive compared to our flagship NIO Houses. Turning to R&D, we remain committed to advanced driving technologies and the development of our second-generation platform, NT2.0. In the future, our R&D investments will focus on mass production applications.
We will actively seek strategic partnership opportunities in advanced technology development as a means to prudently manage our spending in this category. We'll also be reducing costs by further optimizing the size of the workforce. After extensive internal reviews, we have determined that our headcount can be further reduced. We target to reduce our headcount to around 7,800 by the end of the third quarter, from over 9,900 in January 2019, and we expect further headcount reductions by the end of this year through both restructuring and spinning off some business units. With this, I will now turn the call over to our Vice President of Finance, Nick Wang, to provide the financial details for this quarter. Nick, please go ahead.
Thank you, Louis. I will now go over some of our financial results for the second quarter of 2019. To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the second quarter of 2019 were RMB 1.5 billion, or $219.7 million, representing a decrease of 7.5% from the first quarter of 2019. Our total revenue are made of two parts, vehicle sales and other sales. Vehicle sales in the second quarter of 2019 were RMB 1.4 billion, or $206.1 million, representing a decrease of 7.9% from the first quarter of 2019, mainly due to the decrease in sales volume caused by electric vehicle subsidy reduction announced in late March, and the slowdown of macroeconomics in China, which has been exacerbated by the U.S.-China trade war.
Other sales in the second quarter of 2019 were RMB 94 million, or $13.7 million, representing a decrease of 2% from the first quarter of 2019, mainly attributed to the sales decline in charging piles, which was in line with decline in vehicle sales. Cost of sales in the second quarter of 2019 was RMB 2 billion, or $293.2 million, representing an increase of 8.8% from the first quarter of 2019, mainly caused by accrued recall costs in relation to the company's voluntary recall of 4,803 vehicles announced on June 27th, 2019. Total recall costs accrued in the second quarter of 2019 were RMB 339.1 million, or $49.4 million, including RMB 283.3 million, or $41.3 million, recorded in cost of vehicle sales, and RMB 55.8 million, or $8.1 million, recorded in cost of other sales, respectively.
Excluding the accrued recall costs, cost of sales in the second quarter was RMB 1.7 billion, or $243.8 million, representing a decrease of 9.6% from the first quarter of 2019. Gross margin in the second quarter of 2019 was negative 33.4%, compared with negative 13.4% in the first quarter of 2019. Excluding accrued recall costs, gross margin in the second quarter was negative 10.9%. More specifically, vehicle margin in the second quarter of 2019 was negative 24.1%, decrease from negative 7.2% in the first quarter of 2019, mainly driven by the accrued recall cost. Excluding accrued recall costs, vehicle margin in the second quarter was negative 4%. Research and development expenses in the second quarter of 2019 were RMB 1.3 billion, or $189.4 million, increasing 20.6% sequentially, primarily attributed to the increase in the rigorous testing activities of the ES6 before its mass production in the second quarter of 2019.
Selling, general, and administrative expenses in the second quarter of 2019 were RMB 1.4 billion, or $207 million, increasing 7.7% sequentially, primarily driven by the company's marketing expenditures on the Shanghai Auto Show and ES6 test drive campaign in the second quarter. Loss from operation in the second quarter of 2019 was RMB 3.2 billion, or $469.9 million, increasing 23.2% sequentially. Excluding accrued recall costs and expenses, loss from operations in the second quarter was RMB 2.9 billion, or $418 million. Our net loss was RMB 3.3 billion, or $478.6 million, in the second quarter of 2019, increasing 25.2% from the first quarter of 2019. Basic and diluted net loss per ADS in the second quarter were both RMB 3.23, or $0.47. Our balanced cash and cash equivalents, restricted cash, and short-term investment was RMB 3.5 billion, or $503.4 million as of June 30th, 2019.
Now for our business outlook. For the third quarter of 2019, the company expects deliveries of vehicles to be between 4,200 and 4,400 units, representing an increase of approximately 18.2%-23.8% from the second quarter of 2019. Total revenues to be between RMB 1,593 million, or $232 million, and RMB 1.663 billion, or $242.2 million, representing an increase of approximately 5.6%-10.3% from the second quarter of 2019. This concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A sessions. Please.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. To ask questions on the phone, please press star one and wait for your name to be announced. If you would like to cancel a request, please press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, please re-enter the queue. First question comes from the line of Wei Feng from CICC. Please go ahead.
Thank you for taking my question. I have two questions. The first question is about your cash flow from financing activity. Could you please share the progress of your categories in China? Besides the Tencent private placement, will you try other financing options? This is the first question. My second question is about the sales targets of ES8 and ES6. We have observed a good jump momentum of ES6, but ES8 sales declined after recall. Could you please share your thoughts about the sales outlook of ES8 and ES6? Thanks.
Thank you, Feng. I think on the first question, we're not going to take that question for now, because it relates to the China financing projects. You do know that from the release that we do a $200 million convertible bond deal. That one is the one that has already been disclosed. Regarding to the ES8 and ES6 orders, William, do you want to address that question please?
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Thanks for your question. The sales of ES8 in July and August is quite challenging. That's the fact. This is the same challenge faced by other EV companies. With the subsidy reduction starting from the 20th of June, we can see the majority of the sales have declined. This is a challenge for the whole industry.
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As you can see, in July and August, we didn't take any initiatives to provide rebates or the price reduction for the ES8 users. If you consider the transaction price from the users for the ES8, the price of ES8 actually increased by 10%. Just now have mentioned the price of those premium cars in the market actually has reduced. This means it will affect the sales of other cars in the July and August time.
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We are quite confident about the competitiveness of the ES8 product and the service. As you can see, in September, the lease and the sales of the ES8 are picking up in the market. In October, we are going to deliver the 84 kWh battery version ES8. We believe this can actually help us to extend the drive range of ES8, which has been an issue for ES8 in the past, and this can help us to improve the competitiveness of our ES8. In this specific segment for ES8, we believe it can actually compete with other ICE cars and premium SUVs.
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From January to August, the sales of ES8 ranked at the top three for the seven seater and the six seater SUV market segment.
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Thank you.
Thank you for the question. Next question comes from the line of Bin Wang from Credit Suisse. Please go ahead.
I actually have two questions. The number one is about the recall because originally we think the company guide the recall cost will mainly go to the battery supplier, which is CATL. Right now we've seen the result is that most of the costs go to the NIO, more than half. What is the reason it was such a difference? That's for the first one question. The second one is about the margin outlook, because we've seen the organic margin, gross margin in the second quarter actually has been improving compared to first quarter. We seem to see two new developments. The No. 1 is that NIO will open some NIO House over the third-party partners to choose shares part of the profit with the third party. Second thing is that NIO seems to launch more promotion since the third quarter, such as the free auto insurance, sorry, auto finance and free battery swap.
What's the margin guidance? Because previously we guide the margin will improving in the second half. Thank you.
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Okay. Nick, you want to do the gross margin question? Let Eve translate the first part about battery recall.
Actually we have a very clear responsibility with our battery supply chain partners regarding this issue. This has been made clear in the announcement in the National Market Supervision Bureau. You need to understand our relationship with the battery supply chain partner is a long-term one. We have agreed on how we are going to cover the cost of the battery recall. The battery recall is a very significant cost because it will cover the new battery pack production, logistics and execution. We believe the share of the responsibility is actually quite reasonable and the cost segmentation is also quite reasonable. The responsibility is quite clear regarding the battery recall issue.
This is Nick. I'm happy to answer the second question about margins. I'm going to speak only in English for the sake of audience. Actually, in Q2, you're right, one thing, we accrued our portion of the battery recall related cost at a roughly RMB 283 million in the cost of vehicle sales. If you exclude accrued battery recall cost, the company's overall gross margin was around -11% in Q2. Out of it, actually our vehicle sales margin is -4%. Better, OK? Gross margin was better than Q1 margins essentially. We also expect we're going to deliver more vehicles in the second half of 2019, which I believe will certainly help the gross margin from the scale economy, especially production related.
We also expect some mixed margin trend coming from the model mix and options. You can call it the controllable element, but market-driven. OK? With that, the gross margin will highly depend on the volume of the deliveries and unit price, including options of each vehicle we sell. With our best estimation so far, the gross margin will still be negative for the rest of the year, I think conservatively speaking. That's my answer for this margin related part.
Thank you.
Thank you for the questions. Next question comes from the line of Ryan Brinkman from JP Morgan. Please go ahead.
Great. Thanks for taking my questions. The first one relates to gross margin in the context of a softer volume environment. Backing out the higher warranty cost in 2Q with the underlying margin of negative 4% or so have been roughly in line with your expectations. How should investors expect vehicle gross margin to trend going forward given this backdrop of lower industry and NIO volume?
Nick, you want to take that?
I think, yeah. You're absolutely right. Q2, the vehicle gross margin is negative 4%. Again, like I said, the second half, we probably still going to see a pretty tough market. We also see a potential upside in our volumes. I think, overall, the current estimation range for the vehicle margin in Q3 is going to be around, I would say, vehicle margin, I mean, around negative 6%, and Q4 it's between negative 6%-negative 10%, conservatively speaking.
Okay, great. Thanks.
Ryan.
The second and last question. Yep.
Ryan, let me finish that. We're going to start delivering the base model of the ES6 at the end of this month, so probably next week. The ES6 base model will have a lower margin if it doesn't have all the options. It'll be counterweighted somewhat by the 84 kilowatt battery versions that will start shipping next month for Q4, which will have a higher gross margin. Then as Nick said earlier, it depends on the uptake of the volume of the options. The options are very high margin. Volume will definitely help.
Okay.
The vehicle gross margins.
That's very helpful. Thank you.
Next question.
Just my last question is on the distribution strategy. If deliveries remain fewer than anticipated for longer, could that cause you to consider potential adjustments to distribution strategy, particularly with regards to the presumably largely fixed cost NIO Houses. Can you talk about the relative cost and capabilities of a NIO Space compared to a NIO House?
The NIO Space sometimes are paid by partners, and also, the cost would be less than RMB 1 million if we had to do it all ourselves on average. It's very economical. It's also in high traffic areas. That's the direction we're going. The larger NIO Houses were done initially to help the company build a brand and to get users into the NIO brand and NIO user experience. Those have 3-5-year lease terms, so going forward, you'll see our strategy will be to build more smaller NIO Space type operations. If we do renew NIO Houses, they won't be as big and as luxurious as the original ones in Beijing and Shanghai and other large cities.
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I would like to add a few points about the NIO Space. Our cooperation model for the NIO Space is different from the traditional dealership cooperation because for us, we still control the touchpoint and the user relationships in the NIO Space. We have our own fellows to directly serve our users in those NIO Space. It means that our distribution strategy is still direct to sell. We just work with our partners to allocate the facilities and the initial investment at the beginning. Basically, the cost is going to be based on the deals that we have made in the NIO Spaces.
Yeah. Ryan, we are actually very excited about NIO Space. Just as we begin to roll it out in September, we have seen a significant uptake in orders the last three weeks. This whole month of September has been looking much better than July and August. July was quite slow, August a little bit better, September is really picking up. I think it is very important as we reach touchpoints. By the end of this year, we will be in over 100 cities. It is a very cost-effective way for us to increase our reach throughout China's large cities. Okay. Next question.
Thank you for the questions. Next question comes from the line of Dan Galves from Wolfe Research. Please go ahead.
Hi. Thanks for taking my questions. I think as a result of market conditions and the way things have played out this year, it seems like you have a lot of plans of changes to the business. I was wondering and probably thinking about the business at lower volumes longer term. I was wondering if there was any way you could roughly talk to us about, given changes to cost structure that you're planning and changes to distribution strategy, is there a volume level that you believe that you can break even at in the future, and how much capital do you think that you need to kind of execute and have a reasonable balance sheet?
That's a very good question. I think we don't have enough data. We just started rolling out the NIO Spaces. As you know, on the volume side, at the beginning of this year, when we did our forecast for this year, we didn't expect China's auto market has never shrunk, as far as I know.
It shrunk 14 months in a row. You also know we just released a new car, ES6. We would like to see how the momentum and the market, the sales pick up. We will do our budgeting at the end of this year. By then, we'll have three or four months with dozens of NIO Spaces to see how the economics work versus the traditional model. I think is that you're going to see us cut costs significantly, Dan. You will see a much leaner operation from NIO. I think as the volumes won't be the 120,000, 150,000 that we had talked about largely with these big NIO Houses. The other thing is, we have R&D initiatives in place to reduce our battery pack costs significantly, which will come out next year as well.
Those will all be calculated together as we do budgets and as we get more track records. It's a little bit too early. I'm not trying to avoid your question, but we don't have the strategic budget for next year yet, given all these, the turmoil and all the changes in the markets this year. Give us until the end of the year.
Thanks, Louis. That's fair. Just the follow-up, if I could, is the cash burn. I was wondering if you could talk to us about the level of pre-launch cost for ES6 in terms of marketing and engineering that may go away in Q3. On the other side, it seems like most of the cash costs for the recall happens in Q3. Maybe just talk to us about, is there a potential to meaningfully reduce the cash burn that you saw in Q2, in Q3 and Q4?
The answer is yes. We cannot do $3.2 billion in operating loss. You'll see a significant reduction in Q3 and a further reduction in Q4. We have to do it.
Okay. Thank you very much.
Yeah. Don't forget, we've already cut headcount from 9,900 down to 7,800 and there's further to come. We also have strict expense controls in place. We're not expanding capital. We're expanding capital for NIO Spaces, but not for a lot of other things. We have not started adding any swap centers. There's not as much cash usage, and with a lower headcount. We also plan to spin off some non-core businesses as well, which we will disclose as the deals get done. William, did you want to add something?
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Like Louis mentioned, right now we are taking some initiatives to cut down the cost and improve the efficiency. With the ongoing financing project and the cost reduction initiatives as well as the incentive initiatives to improve the operational efficiency, we believe the company will have a sustainable development and operation. The company has been very transparent on our financials, including cash flow and cash positions. We would like the investor community and the media to have a complete and fair view about the company's cash situation. Recently, some media has reported some inaccuracies in numbers about our cash situation. In the report, the media mentions that we have operating loss that is around $5.7 billion, which is not accurate. I would like to use this opportunity to make some clarifications.
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In their report, they have accounted in the accretion on the preferred shares issued to private equity investors prior to the IPO last year.
Our non-GAAP operating loss was RMB22 billion, which is significantly lower than the RMB5.7 billion the media has reported. Among the RMB22 billion, over RMB10 billion was spent on the R&D efforts and the projects. We have always considered R&D and user services as our priority in our investment and spending. We have filed 4,200 patents globally and built a very strong EV brand in the premium sector. In terms of the service network, we have built a comprehensive service network nationwide, covering users in 270 cities in China. As everyone knows, the R&D for the auto industry requires a long lead time. We are now committed to developing the NT2.0 to use the advanced and cutting-edge technologies and autonomous driving technologies in our products. With that, we have to raise the sufficient capital to support our future development.
As the only Chinese premium smart EV brand and a very premium global competitive brand, we are confident that investors will support us.
Yeah, I think I found the Bloomberg article very insulting. The headline was $5 billion loss. As William said, they didn't break out the fact that a lot of those were preferred shares, pre-IPOs were marked up at the IPO. The real number is closer to the $3 billion over four years, and as William said, most of that is toward R&D. We weren't very happy with the way Bloomberg chose that as the headline. It's not very accurate. Okay. Okay, next question.
Thank you. Next question comes from the line of Paul Gong from UBS. Please go ahead.
Hi. Thanks for taking my question. I have two questions. The first one is regarding the regional promotion mentioned by Louis. Given this involves a lot of detailed measures like the battery swap service and some extra incentive, including the financial lease, can you help us to quantify what is a rough amount per vehicle, and is this only applicable to ES8, or is also applied to ES6 as well? This is the first question regarding the incentive. My second question is regarding the cost cuts on the cost of goods sold, especially from the procurement. Have you renegotiated with your supplier on the cost cut after the subsidy cuts in late June? If yes, can you help us to give a rough idea how much has been cut in the second half versus first half, especially on the battery side? Thank you.
William, do you want to discuss the incentives? Then Nick, you can discuss the financial impact of the batteries in the supply chain.
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Recently, we have launched the free Power Swap services to the users if they drive their car to the Power Swap Station, which has been quite widely welcomed by our users. Every day we have around 1,000 users drive their car to the Power Swap Station to use this service. As you know, the Power Swap Station cost mainly includes the construction cost and the renting cost. The electricity cost is actually quite low. For one Power Swap, it may cost around 50 kWh, and this means that the cost will be around RMB 50. In this calculation, it means that every day, the additional cost will be around RMB 50,000.
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Actually, we have a very high charger installation rate, which is close to 80%. Overall speaking, the free power swap services will not contribute a lot to the company's cost. It will not impact on the cost very significantly. Previously, we have already promised to our users that they can enjoy the intercity or out of city free power swap services. This can be considered as a part of the cost.
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Compared with our competitors free supercharging services, our experience is much better.
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Right now, there is a very popular concept among the users that is they would like to get a house close to the Power Swap Station.
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Thank you for your question.
Nick, do you want to talk at all about it? I think a lot of the supply chain costs, we are renegotiating with a lot of suppliers as our volume begins to get a lot larger. Second is also I think the battery pack cost has come down on a year-over-year basis, and will continue to go down, we believe, each year on a per kilowatt basis by 10%-15%. Nick, is there anything else on the supply?
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In terms of the battery cost, we can predict the quarterly battery cost reductions. This is mainly due to the volume increased by the industry and NIO in terms of the battery pack. Right now, we can go from now to the next year fourth quarter, where we need to continue the reduction of the battery cost. Right now, I cannot share with you about the specific percentage, because we have reached agreement with our supply chain partners regarding this. We believe for the next Q3 and Q4, we should be able to receive significant cost reduction.
Thank you, Paul.
Hey, Paul.
Okay. Go ahead, Dan, if you want to ask me first.
Your first part of question also involving what the financial leasing actually. We actually have a very successful financial leasing plan roll out nationwide with seven partner banks, some of the big commercial banks, I mean. These serve the purpose of attracting a lot of traffic into our showroom, and we can see a clear upward trend in the past two months. Also in terms of per unit cost, is a function of the overall percentage of how many customers pay 100% or take this financial product, and how much percentage actually they take interest subsidy program, essentially. Namely, we used to have this RMB 100,000 battery leasing program. Now we replace it, in a majority way, a third-party financial institution, I think financial loans with a similar amount, but we actually have a discount subsidy on this, interest subsidy on this. Overall, I think the per unit basis on a rough estimate, I think it's roughly RMB 10,000 per unit, roughly.
10,000 per unit.
Yes, roughly.
Okay, thank you.
Thank you, Paul. Thanks, Nick. Operator, does that conclude the hour?
Yes, certainly. There are no further questions at this time, and the call is now around the hour mark. I will turn the call back to company for closing remarks.
Okay, thank you once again for joining us on this quarter's conference call. We look forward to talking to you next quarter. Have a good evening. Have a good day.
Good day. Thank you very much.
Thank you.
This concludes this conference call. You may now disconnect the line. Thank you.