Hello, ladies and gentlemen.
Thank you for standing by for Nideo Incorporated's First Quarter of 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Jade Wei, Senior Director of Investor Relations of the company.
Please go ahead, Jade.
Thank you, Annie. Good evening and good morning, everyone. Welcome to NIO's Q1 2019 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. 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 Huang, our VP our Vice President of Finance. Louis is joining us by telephone from the United States. Before we continue, please be kindly reminded that today's discussion will contain forward looking statements made under the Safe Harbor provision 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 turn the call over to our CFO, Nui Hsieh. Nui, please go ahead.
Thank you, Jade. Hello, everyone, and thank you for joining our call today. In the Q1 2019, NIO delivered 3,989 ES8s, our high performance premium electric SUV, exceeding the company's prior delivery targets between 3,500 to 3,800. This was followed by 11 24 ES8 deliveries in April, bringing total aggregate deliveries to 16,461 vehicles as of August 30, 2019. Compared to the Q4 2018, we experienced softer demand in the Q1 due to accelerated deliveries made at the end of last year in anticipation of electric vehicle subsidy reductions as well as seasonal factors surrounding the Chinese New Year holidays.
Further, we have seen the slowdown in ES8 orders, which began became noticeable after Chinese New Year and has worsened into the current quarter. We anticipate a sequential decrease in deliveries when Q2 closes, primarily due to 1, macroeconomic concerns over the lingering U. S.-China trade war 2, overall continued sluggishness in the Chinese auto market, which saw year over year year to date wholesale vehicle sales dropped 15% year over year and retail vehicle sales dropped 12% year over year 3, larger than anticipated electric vehicle subsidies cuts, which lower ES8 subsidies by 40% to RMB4500 from RMB67500 in 2018. Subsidies will further be released reduced to RMB11520 beginning June 26, 2019. Additionally, we believe there is some cannibalization of ES8 orders in the current quarter caused by ES6, which became available in NIO Houses this quarter.
ES6 is a sportier, less expensive SUV by approximately RMB90,000. We anticipate this move this more challenging and uncertain sales environment to dampen sequential demand and reflects continued weakness in ES8 sales in the current quarter. In light of these challenges, sales backlog and macroeconomic environment repeat, in light of the challenging sales backdrop and macroeconomic environment, the company has already began taking steps to control costs and optimize operational efficiencies. Nick will elaborate on later on this call. But some early results of our cost control efforts are already reflected in 1st quarter numbers.
A quarter over quarter 28.8 percent sequential decrease in R and D spend and a quarter over quarter 32.2 percent sequential decrease in SG and A spend. These initial efforts provide us the runway required to optimize the business sustainability for the long run. We expect to see more efficiency gains to pick up in the coming quarters. Also as part of the larger restructuring initiative to optimize operational efficiencies, we made the hard and necessary decision to pare down headcount by 4.5 percent to 9,390 globally as of April 30, 2019, down from 9,834 at the end of 2018. And now I'd like to give you an update on our sales expectations for ES8 and ES6.
With 11 24 ESA deliveries in the month of April, total ESA deliveries for the year 2019 4 months stood at 5,113. Moving to our ES6, our second production model, a 5 seater high performance premium electric SUV. We are excited that as of today, the first ES6 ready to be delivered in our external users is rolled off the production line. In June as scheduled, more ES8s will be produced and the first deliveries will reach NIO users. The ES6 has received broad based positive feedback from the media and potential customers.
Ever since its recent Shanghai Auto Show and the early reviews from our ES6 test drive campaign launched in May bode well for continued positive momentum. We currently have more than 12,000 ES6 preorders as a growing pipeline, among which over 5,000 were added during the past 5.5 weeks since the Shanghai Auto Show. When our users had the access to the touch and feel of the ES6 for the first time, We are confident that as more and more new potential users start to experience the ES6 firsthand from behind the wheel and on the road that the vehicle's competitive features and price will translate to increased market demand. Now through the lens of optimizing efficiencies, controlling costs and managing cash flows, I would like to provide some specifics on how we are approaching certain business decisions as to relate to our service network. Starting with our NIO houses.
NIO houses and NIO Popeye houses are important to our direct sales model. We currently have 15 NIO houses in 12 cities across China. These are complemented by 17 NIO Pop Up houses as an additional 17 cities. Going forward, we will shift our focus to smaller NIO pop up houses in a similar kind. NIO pop up houses require less capital and provide greater flexibility on the cost side.
We believe that the combined number of NIO houses and NIO pop up houses across China provide the necessary support and coverage for our sales and market penetration plans and a limited number of new facilities will be added in the near future. For NIO service centers, as of April 2019, we have 14 covering major cities across the country. We had an additional 100 authorized service centers nationwide, forming a comprehensive network coverage. Authorized service centers or ASCs represent cooperation with existing Tier 1, 4S dealership partners. We have a dedicated team that selects, trains and certifies ASCs to be part of our network.
To support our sales goals in 2019, we will focus on the asset light ASC to extend our service coverage. Turning to NIO Power. We presently have 125 NIO Battery Swap Centers throughout the country, which we believe will provide sufficient coverage for our users at this stage. By continually analyzing our location data, we can flexibly deploy these resources and adjust locations to fully optimize the efficiency of this power solutions network. With NIO Power Mobile, we currently have around 500 on the road, which can easily support both our current users as well as Currently around 80% of NIO users have installed home chargers, which remain as the most efficient and cost effective power solution for both our users and the company.
We launched our fast charger power station recently at the Shanghai Auto Show and the number of the fast chargers is still small. We still only install future fast chargers based on surge demand of our vehicles and service needs. In April, we opened our one click power solution network in other electric vehicle to other vehicle electric vehicle brands in China. With this program, 3rd party EV owners in China are able to use the NIO Power One Click Valet charging service. This will allow for the growth of the service, improve the operating efficiency and expand NIO's brand awareness across the electric vehicle general public.
On a separate note, I would like to give you a brief update on a few of our ongoing initiatives. At the Shanghai Auto Show, company showcased a preview version of ET7, a high performance premium electric sedan. Recently, the company made the decision to design and develop ET Series with the future NIO Platform 2.0 or MP2, a new generation product platform of NIO with level 4 autonomy driving autonomous driving capabilities. We will provide an update on the launch timeline of ET series in the future. Meanwhile, the company plans to leverage the platform technologies from ES8 and ES6 to create a new model design more efficiently and expect to launch the 3rd vehicle model in 2020.
We will continue to invest in research and development in our products and our technologies, in particular, MP2. As we do so, we will look to build strategic research alliances with partners in the automotive and technology sectors. We expect such collaborations can continually advance the technologies of our vehicles and platforms to leverage strength and resources. Recent developments. First, we are very pleased to announce that NIO has entered into a framework agreement with Beijing Etown International Investment and Development Company.
Etown Capital, an investment company headquartered in Beijing, Economic Technology Development Area, so called BDA. Pursuant to this agreement, the company will establish an entity as Neo China in the BDA and contribute certain businesses and assets into this entity. Etown Capital will initially invest up to RMB10 1,000,000,000 through its affiliated entities or jointly with third parties in Neo China in exchange for a minority equity stake. Furthermore, it is expected that E Town Capital will help NIO to build or define 3rd party partners to build a new manufacturing facility for our next generation vehicles of NIO. We will continue working together towards signing a binding definitive agreement for this investment.
2nd, in April 2018, the company established a joint venture company GAC NIO together with NIO Capital. Guangxi New Energy Automotive and GAC to mainly engage in electric vehicle and parts development, sales and service William Li, Founder, Chairman and Chief Executive Officer of NIO is serving as the Chairman of GAC NIO. About a week ago, GAC NIO released a new brand, HiCanHeChuang and plans to launch the 1st vehicle model this year. We expect to work strategically with GAC Neo and leverage each other's strengths in technology supply chain and service networks. 3rd, ES6 manufacturing agreement.
In April 2019, we entered into a manufacturing cooperation agreement with JAC for the ES6, which is basically a supplement to our existing manufacturing agreement of the ES8. We will continue paying JAC manufacturing fees as a per vehicle basis and compensate JAC for its audited operating losses. Please refer to our earnings press release published on our RA website a few hours ago for more details. With that, I will now turn the call over to our Vice President of Finance, Mr. Nick Wong to provide the financial details for the quarter.
Nick, please go ahead.
Thank you, Louis. I will now go over some of our financial results for the Q1 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 Q1 of 2019 were RMB1.6 billion or US243.1 million dollars representing a decrease of 52.5 percent from the Q4 of 2018. Our total revenues are made of 2 parts: vehicle sales and other sales.
Vehicle sales in the Q1 of 2019 were RMB1.5 billion or US228.8 million dollars representing a decrease of 54.6 percent from the Q4 of 2018. The decrease in vehicle sales over the Q4 of 2018 was attributed to accelerated deliveries of the ESA in the Q4 of 2018 in anticipation of in China in 2019 as well as the seasonal slowdown surrounding the Chinese New Year holidays in the Q1 of 2019. Other sales in the Q1 of 2019 were RMB96.0 million or $14,300,000 representing an increase of 76.4 percent from the Q4 of 2018. The increase in other sales over the Q4 of 2018 was mainly attributed to increased revenue derived from new live merchandise and services provided in Q1 of 2019. Cost of sales in the Q1 of 2019 was RMB1.9 billion or US275.7 million dollars representing a decrease of 45.9 percent from the Q4 of 2018.
The decrease in cost of sales over the Q4 of 2018 was mainly driven by the decrease of delivery volume on the ESA in the quarter. Gross margin in the Q1 of 2019 was negative 13.4% compared with positive 0.4% in the Q4 of 2018, mainly driven by the decrease of vehicle margin in the quarter. More specifically, vehicle margin in the Q1 of 2019 was negative 7.2% compared with positive 3.7% in the Q4 of 2018. The decrease in vehicle margin was mainly driven by the decrease of delivery volume of ESA in the quarter. Research and development expenses in the Q1 of 2019 were RMB1.1 billion or 150 point $7,000,000 representing an increase of 55.4 percent from the Q1 of 2018 and a decrease of 28.8 percent from the Q4 of 2018.
Excluding non GAAP share based compensation expenses, research and development expenses were RMB1.0 billion or US155.9 million dollars representing an increase of 52.7 percent from the Q1 of 2018 and a decrease of 30% from the Q4 of 2018. The decrease in research and development expenses over the Q4 of 2018 was primarily attributed to the higher design and professional expenses incurred in Q4 of 2018 to support a frequent test research and development stage of the ES6, our 5 seater high performance premium electric SUV launched in December 2018. Selling, general and administrative expenses in the Q1 of 2019 were RMB1.3 billion or 196.7 $1,000,000 representing an increase of 71.5 percent from the Q1 of 2018 and a decrease of 32.2% from the Q4 2018. Excluding non GAAP based share based compensation expenses, selling, general and administrative expenses were RMB1.2 billion or US183.9 million dollars representing an increase of 67.6 percent from the Q1 of 2018 and a decrease of 32.4 percent from the Q4 of 2018. The decrease in selling, general and administrative expenses over the Q4 of 2018 was primarily attributed to decreased marketing and promotional activities and decreased expenditures on outsourcing professional services.
Loss from operations in the Q1 of 2019 was RMB2.6 billion or US390.0 million dollars representing an increase of 78.8% from the Q1 of 2018 and a decrease of 24.1 percent from the Q4 of 2018. Excluding share based compensation expenses, non GAAP adjusted loss from operations was RMB2.5 billion or US372.2 million dollars representing an increase of 75.7 percent from the Q1 of 2018 and a decrease of 24.4% from the Q4 of 2018. Share based compensation expenses in the Q1 of 2019 were RMB119.6 million or $17,800,000 representing an increase of 184 percent from the Q1 of 2018 and a decrease of 15.6% from the Q4 of 2018. The decrease in share based compensation expenses over the Q4 of 2018 was primarily attributed to the decrease of share based compensation expenses related to certain directors and executive officers. Our net loss was RMB2.6 billion or US390.9 million dollars in the Q1 of 2019, representing an increase of 71.4 percent from the Q1 of 2018 and a decrease of 25.1% from the Q4 of 2018.
Excluding share based compensation expenses, adjusted non GAAP net loss was RMB2.5 billion or US373.1 million dollars in the Q1 of 2019, representing an increase of 68.2% from the first quarter of 2018 and a decrease of 25.5% from the Q4 of 2018. Net loss attributable to NIO's ordinary shareholders in the Q1 of 2019 was RMB2.6 billion or US395.2 million dollars representing a decrease of 32.8% from the Q1 of 2018 and a decrease of 24.6% from the Q4 of 2018. Excluding share based compensation expenses and accretion on redeemable non controlling interest to redemption values, adjusted net loss attributable to NIO's ordinary shareholders on a non GAAP basis was RMB2.5 billion or US372.7 million dollars Basic and diluted net loss per ADS in the Q1 of 2019 were both RMB2.56
or RMB0.38.
Excluding share based compensation expenses and accretion on redeemable non controlling interest to redemption value, non GAAP adjusted basic and the diluted net loss per ADS were both RMB2.42 or $0.36 Our balance of cash and cash equivalents, restricted cash and short term investment was RMB7.5 billion or US1.1 billion dollars as of March 31, 2019. On January 1, 2019, the company adopted ASC eight forty two leases and used additional transition method to initially apply this new lease standard at the adoption date, right of use assets and lease liabilities were recognized on the company's consolidated financial statements. And now for our business outlook. For the Q2 of 2019, the company expects deliveries to be between 2800 and 3200 vehicles, representing a decrease of approximately 19.8% to 29.8% from the Q1 of 2019. This outlook incorporates the planned delivery of several 100 ES6 in June 2019.
The company also expects 2nd quarter total revenue to be between RMB1.1 billion and RMB1.3 billion or between US169 million dollars and US193 million dollars This would represent a decrease of approximately 20.7 percent to 30.5 percent from the Q1 of 2019. So this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q and A sessions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Your first question comes from the line of Binh Huang of Credit Suisse. Please go ahead.
Hi. Thank you so much for taking my questions. I have 3 ones. The first one is about ES6 order. Actually, you said that in the past 5.5 weeks, we got around 5,000 orders.
I would recall in the conference call in the year 2018 results, you mentioned already have 7,000 orders by around March early March. So in the launch 1 month in between, it seems that in net 1 month no match order received. Can you explain why in net 1 month no match order for ES6? That's number one question. Number 2 question is about your recent announcement about NIO China.
Can I know what's the specific arrangement? It seems that under the last call will be another joint venture between NIO Inc. And Itang? And what will be the asset injection into this NIO China asset detail, please? And number 3, can you confirm whether your full year volume guidance changed or not?
And remember, your full year volume guidance is 40,000 units. It's more than 20,000 units of ES6. Can you remind us your full year volume guidance? Thank you.
Hey, Wanping, this is Louis. I'll take 13 and I'll let William and Nick answer 2. For 1, we had about we had 7,000 something orders, pre orders for ES6, but don't forget those orders are refundable. So during May, March and I mean during that month before the Shanghai Auto Show, there was a thousand or so plus, I can't remember the exact number, who also got a refund on their order. So what we're talking about is new orders from April, I guess 17th or 18th when the Shanghai Auto Show started until yesterday.
So those 5 weeks, but don't forget there's also cancellations in order, so it's a moving target. But it's very encouraging to see 5,000 new pre orders in only 5.5 weeks since ES6 was launched. It has gotten obviously very good accolades and very good reviews from the press and from the driving magazines. On question 3, regarding the guidance, we had targeted for the year, I've been telling people recently about 35,000 to 40,000 as of in March or so a few months ago. The slowdown has hit us with the subsidy reduction.
Remember ES8 subsidies went from 67,000 down to 140,000 and going to 11,000 ES8 soon. And then with the trade war and the softening environment. I think at this time, we are not prepared to give any kind of target number for the full year. What I'd like to do is wait until ES6 is launched and see how that ramps up. So we'll be in a better position to give full year sort of targeted numbers.
It's unofficial, but targeted numbers in a couple of months once ES6 is launched. And then William and Nick, you want to take the Itown question?
Yes. Okay.
Wang Bin, thank you for your question. So regarding our recent announcement about our framework agreement with the Itau International Investment and Development Company, which is Itau Capital. Actually Itang Capital will be helping us through its 3rd party partners and also its affiliated entities to inject about RMB10 1,000,000,000 in exchange for the minority equity stake for the NIO. And at the same time NIO will be establishing NIO China in the BBAE town. So we will be reallocating part of our major business to this NIO China, but still NIO Inc.
Will be holding most of its control over the NIO China and also NIO China will be part of our consolidated statements. So NIO China will be important channel and the tool for our RMB fundraising, because through our public in the NYSE, we have a very diverse fundraising channel for the U. S. Dollars. With the NIO China, we can diversify our fundraising channel for the RMB.
With both fundraising channels, I think it will help us to sustain our future development for the 2nd generation platform. And the team is now working with Itan on the details of this definitive agreement. And there will be a lot of details that need to be refined, and we will keep you guys updating on this news.
Thank you. Our next question comes from the line of Wei Fang of CICC. Please go ahead. Your line is open.
Okay. Thank you for taking my question. So my first question is also about NIO China. So if Yitong will become a minority shareholder of NIO China, besides the RMB10 billion fresh capital, what can NIO expect from Yitong? And will NIO set up manufacturing capability in Beijing?
So, do you prefer the outsourcing or turn to the in house manufacturing in the future? That's the first question. And the second question is about how to stimulate the sales. If the demand continues to remain weak, do you have any other plans to stimulate the sales? That's the second question.
And the second question is about NIO and GAC NIO. Would JV in the future generate any cash flow to NIO? And what is synergies between NIO and the JV NIO? Thank you.
William, you want to take these three questions after you translate?
Okay. So regarding your first question, the framework agreement that we entered with Itong Capital is mainly has many mentioned that the Iton Capital will be helping us or will be helping us to find the 3rd party partners to build a manufacturing facilities for our next generation platform products. But for the near term, we will be upholding the joint manufacturing model as we are having right now with the JAC, because this manufacturing corporation has a very high efficiency in terms of the management and investment. Of course, we will not exclude any opportunities that we may be establishing our own manufacturing facilities. But for this RMB10 1,000,000,000 fundraising or equity raising, it is more of a development research and also the user network requirement.
Regarding your second question about the sales volume of ES6, actually we've kicked off the global media test drive and also the nationwide user test drive and we've been collecting a lot of feedback, a positive feedback and the review from these people and participants. So for the next following months, we will be taking active market campaign both online and offline, so that more people can appreciate and understand our products. We will optimize more test drive for our potential users and we will also seek to expand our sales channels. Of course, direct selling will still be one of our top priorities, but at the same time, we will try to find opportunities so that we can present our products from our partner sites and more people will get to know our brands. And for ES6, we believe it is a very powerful and strong product compared with the Q5 from Audi, GLT from Mercedes Benz and X3 from BMW.
Actually ES6 is on par with this. If you look at the sales volume of ES8 for the first 4 months of 2019, you will find its sales volume ranked the 3rd place among all the 7 seater premium SUV. Actually the sales volume of ES8 has surpassed the volume of XC90 for the 1st 4 months this year. And the sales volume of ES8 is a two size, the sales of the Model X from Tesla. And for ES6, it will be tapping into a wider market, the 5 seater SUV.
And in this competition, we believe that the ES6 will be outperforming other products even including the gasoline cars. As for your third question about the joint venture between GAC and NIO, We just announced the GAC NIO's latest brand that is Hi Com Hechuan and they will be launching their product next year. This is a very important long term strategic partnership for both sides. So we can leverage each other's strength in terms of the R and D, supply chain and service network and we can also utilize the synergies. And we have confidence with this sustainable and long term partnership.
We may not see immediate or we may not see some immediate payback or returns at the short term, but we believe for the long term this will be a very good partnership for both sides. And also for this HiComm, actually the price range of HiComm will be a bit lower than the price range of NIO products. So with this platform or with this joint venture, it doesn't mean that NIO will be selling our products directly with this platform. Instead, we want to leverage its cost efficiency on this highly competitive platform, so that we will be tied into the wider market. This is another approach for NIO to expand our market presence.
Okay. Thank you.
Thank you. Our next question comes from the line of Dan Galves of Wolfe Research. Please go ahead.
Thanks for taking my questions. The first question is related to the competitive dynamic for ES8. What have expected with the subsidy ready to come down even further in June that you might have a pre buy of this product. Maybe if you could just talk about what vehicles the ES8 is competing with and how it's doing competitively in terms of market share? The second question is just about if you could help us to understand the cash burn in Q1, if you could give us any detail on what the CapEx was, working capital?
And more importantly, what is the outlook for the cash burn in future quarters once the ES6 launches? Should we be expecting a significant lower cash burn in the future? Thank you.
William, do you want to take the ES8 competitive landscape question? And Nick, you can take the cash burn question for R and D and CapEx spend. William?
Okay.
Regarding the question about the competitiveness of ES6 sorry ES8, actually ES6 ES8 not only targets at the premium electric SUV, it also aims at the segment of all the premium 6 and the 7 seater SUV, including EV and also the gasoline cars. So our competitors in this segment include Q7 from Audi, GLS from Mercedes Benz, Xinyi from Volvo and Model X from Tesla. So for the short term, the subsidy reduction may affect our competitiveness a little bit, but we do have other advantages, including our high performance, our user satisfaction, our user network and for our users, they get to enjoy 10% purchasing tax discount for buying a EV. And we also enjoy the preferential policies for the license plate application and usage in cities like Beijing or Shanghai. So in the long run, these advantages will help us to offset the impact of the subsidy reduction.
And we believe that ES8 will strong will still be a very strong and powerful product in this segment. Thank you.
I think to answer your questions about the cash burn, I think in Q1, we I won't call it burn, we actually have a cash out net cash outflow over RMB4 1,000,000,000. But the special note need to be paid to that because in December, we delivered more than 7,000 units, but in Q1, we only delivered like roughly half of it. So there's a huge working capital gap. A lot of the payments occurs in the months of January February as well. So working capital is take a significant portion of it.
And also the if you look at our expenses item like R and D as well as SG and A, that actually take some large portion as well. So overall, and moving forward, we think that this cash burn rate is going to go down quarter by quarter for a couple of reasons. Number 1, is actually the with the launch of ES6, we're going to bring more volume into the picture accordingly that as a result, working capital is going to help our cash flow. Number 2, with the launch of our LOP or lean operation program, essentially, you can call it the internal organizational optimization program. We're going to cut down our cost, cut down unnecessary spending in both the strategic spending and R and D by rebalancing our product portfolio and also balancing our self network spending versus seek some strategic alliance in the channels, so we can cut down significantly.
And also in terms of our people's and the daily operation, we issued a new policy and put the stringent mindset into people's mind. So and makes the lean operation concept not only reflected in the numbers, but also reflected in every mine to our employees.
Dan, it's Louis. We expect Q2 cash burn to be a little bit high, but then Q3 and Q4 once ES6 starts delivering, we expect the cash burn to come down relatively quickly. Okay. Thank you.
Thank you. Our next question comes from the line of Fei Fang of Goldman Sachs. Please go ahead.
Hi, William, Louis, Nick, Jade. Thanks for taking my question. Can you give us an update on the content and specs of the ES6? Are we still on track to install A11 NCM batteries? And also will level 2.5 be ready upon the launch?
And also in light of the current environment, do you see opportunities to reduce component prices from suppliers? And if so, where do you see most of that, whether it's battery, motor, inverter or others? Thank you.
Thank you, Fei. William, do you want to talk about ES6 specs and the current reduction in price possibilities?
About the 811 NCM battery pack actually it is proceeding as our schedule. So it will be available to our users in July. And actually in our validation test, the 8111 NTM battery pack shows strong performance. So we are quite confident about it. As for our cooperation and partnership with CATL, our battery cell supplier, actually we have a long term cost reduction framework with CATL.
So we will be witnessing significant cost reduction in terms of the battery pack from the 3rd and the 4th quarter this year. Based on our volume assumption in this framework, you will witness this cost reduction very soon. Thank you.
That's very helpful.
Hey, Dan, it's Louis. I'm sorry, it's Louis. Some of the specs just for you and for which you asked about. The ES6 is very competitive with the likes of Mercedes EQC, I PACE Model 3 and Model X and Model S from Tesla. So it's very fast, 0 to 60 in 4.7 seconds.
It has longer range, 500 plus kilometers with an 84 kilowatt battery. And so its performance, its communication, its service, everything should be very competitive, if not better. And it's priced below all those models, including the Model 3. So we think it's a very price competitive car. It looks sporty, it's sharp, it is full of amenities.
Thank you. Our last question comes from the line of Yan Lin of Deutsche Bank.
I've got two quick questions here. My first question is on the future new products. As Louise has just mentioned, it seems like we will be launching another model in 2020 before the Ity series. Just could you please share with us your thoughts behind this decision? And also, will this be another SUV model?
And what sort of market segment are we targeting at? And my second question is, as mentioned just now, the demand was negatively impacted by the SUV subsidy cuts. So wondering if there's any chance of if there's any chance that you will be adding lower price trims for the ES6 and ES8 models to drive the demand. Thank
you. William, do you want to answer these 2?
Okay. So about the YiT7 and also our new product, we launched our YiTi preview during Shanghai Auto Show this year and we have received a lot of positive feedback and review about this Ity preview. But actually earlier this year, we decided that we would like to launch our ET7, our 2nd generation platform, MT2, because recently we decided to launch this ET7 on our 2nd generation platform MP2 because the next several years will be very important for the transformation of ADAS, AD and the SmartNess Technologies. So you will be seeing the transformation for the sensors, for the computing units and also for the e architecture of the vehicle. And we want to see this ongoing transformation.
That's why we decided to put the ET7 on the 2nd generation platform. So in terms of the launching time of ET7, it is postponed a little bit. I think this is also the best decision. It is postponed for the next generation. I believe this is a best decision for the company, for our investors as well as our users.
But at the same time, we understand that the market is expecting a new product or a new model from Niu. So earlier this year, we decided that we on top of the current generation platform, we would like to leverage our existing technologies to launch a new model next year. And at the moment, we may not share sufficient information with you, but you understand that NIO can be quite efficient and agile in terms of our product development. So you can expect the launch of this new model next year. As for the demand after the subsidy cuts, actually for our ES6 and ES8, we target at the premium SUV segment for both electric cars and also the combustion cars.
For ES6 and ES8, their competitors including a lot of premium SUVs from luxury brands. And even with this competition, we still believe that we have strong competitiveness. We have the tax discount with purchasing tax, consumption tax and also duty. We also have a strong performance. We have good user services.
We also have the preferential policies for the license plate application and usage. So we believe that maybe in the short term, the subsidy cost may affect us a little bit. But in the long run, we do have the strong market performance in this segment. And as more and more people start appreciating and adopting EVs, we believe in the long run ES6 and ES8 will be very powerful.
Thank you. Thank you.
Thank you.
Our next question comes from the line of Paul Gong of UBS. Please go
ahead. Yes. Thank you. I have two questions. The first one is regarding this new subsidiary, NIO China.
Since Yitang Beijing Yitang has committed RMB 10,000,000,000 just for minority interest in this new entity. Does that mean RMB 10,000,000,000 is also committed for more than RMB10 1,000,000,000 investment into this NIO China entity. If so, this NIO investment into the NIO China in the form of cash or in the form of technology or whatever or maybe IP? Can you give us a little bit color on this? This is my first question.
My second question is, I noticed on the balance sheet, there is an item within the equity called additional paid in capital. That has declined from KRW 41.9 billion to KRW 40 1,000,000,000 declined by KRW 1,900,000,000 during this quarter. Can you please give us a little bit color on what was the reason for that? Thank you.
William, you want to talk about eTown, Neo China?
Okay.
Regarding our regarding this new China with Itau, actually it doesn't mean that we will be investing more than RMB10 1,000,000,000 into this new China in exchange for more equity stocks. Instead, if you look at our NIO Inc. Current business, actually most of our business, including our employee, including our self network and our major business are based in China. Over 90% of our employees are based in China. So for this asset, for this existing asset, we already have a very high end of goods evaluation.
So this is how we work with this NIO China. We will be leveraging this existing asset and the business for the equity fundraising. Thank
you. So it's actually more appropriate to understand it in the way you give some minority shares to Beijing Yitong and they paid in RMB 10,000,000,000 as an investment into this entity. So it's kind of in a form of further finance through equity?
Yes, that's correct. That's actually from Itau and it's affiliated. Okay. I'm going to address the second question, Paul. Essentially, this reduction on equity portion, dollars 1,900,000,000 reflected and was strictly related to the convertible bond that we issued back in around the end of January, early February.
So in this bond, I can explain a little bit more detail. There's 2 derivative product. 1 is called a prepaid forward. The other one is additional co option. If you understand the fundamental structure initial structure of convertible bond, it's actually a face value plus 30% of the 30% of the price over the stock price at the time of the insurance.
So on top of it, we actually put additional co option, which raised the stock price, the strike price from 30% to 100%. So that's take roughly US80 $1,000,000 The other one is the prepaid forward capital. Essentially, we use a part of the proceeds from this debt issuance to buy back some of the stock and to sweeten the deal essentially. So make this transaction completely completed. So overall, this has actually resulted in the reduction in our equity positions of RMB1.9 billion as you can found in our balance sheet.
Thank you, Paul.
Okay. Thank you.
Thank you. As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.
Thank you everybody for joining us today.
Thank you. See you next quarter.
Thank you, everyone. Thank you.