Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s first quarter 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, 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 first quarter 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 Wang, our Vice President of Finance. Louis is joining us by telephone from the U.S. 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 laws. 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, Louis Hsieh. Louis, please go ahead.
Thank you, Jade. Hello, everyone, and thank you for joining our call today. In the first quarter 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 1,124 ES8 deliveries in April, bringing total aggregate deliveries to 16,461 vehicles as of August 30, 2019. Compared to the fourth quarter 2018, we experienced softer demand in the first quarter 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 became noticeable after Chinese New Year and has worsened into the current quarter. We anticipate a sequential decrease in deliveries when second quarter closes, primarily due to, one, macroeconomic concerns over the lingering U.S.-China trade war.
Two, overall continued sluggishness in the Chinese auto market, which saw year-to-date wholesale vehicle sales drop 15% year-over-year, and retail vehicle sales drop 12% year-over-year. Three, larger than anticipated electric vehicle subsidies cuts, which lower ES8 subsidies by 40% to 40,500 RMB from 67,500 RMB in 2018. Subsidies will further be reduced to 11,520 RMB 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 90,000 RMB. 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--
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 later on this call. Some early results of our cost control efforts are already reflected in first quarter numbers. A quarter-over-quarter 28.8% sequential decrease in R&D spend and a quarter-over-quarter 32.2% sequential decrease in SG&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% to 9,390 globally as of April 30, 2019, down from 9,834 at the end of 2018.
Now I'd like to give you an update on our sales expectations for ES8 and ES6. With 1,124 ES8 deliveries in the month of April. Total ES8 deliveries for the year 2019, four months, stood at 5,113. Moving to our ES6, our second production model, a five-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 Auto Shanghai, 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 pre-orders as a growing pipeline, among which over 5,000 were added during the past five and a half weeks since the Auto Shanghai. When our users had the access to the touch and feel 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 relate to our service network. Starting with our NIO Houses. NIO Houses and NIO pop-up 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. 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 our anticipated future users in 2019. 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 Auto Shanghai. 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 OneClick power solution network to other electric vehicle brands in China. With this program, third-party EV owners in China are able to use the NIO Power OneClick 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 Auto Shanghai, the 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 NT2.0 Platform, or NP2, a new generation product platform of NIO with Level 4 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 third vehicle model in 2020. Excuse me. We will continue to invest in R&D in our products and our technologies, in particular, NP2. 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 through leveraged strength and resources. Recent developments.
First, we are very pleased to announce that NIO has entered into a framework agreement with Beijing E-Town International Investment and Development Company. E-Town Capital, an investment company headquartered in Beijing Economic-Technological Development Area, so-called BDA. Pursuant to this agreement, the company will establish an entity as NIO China in the BDA and contribute certain businesses and assets into this entity. E-Town Capital will initially invest up to RMB 10 billion through its affiliated entities or jointly with third parties in NIO China in exchange for a minority equity stake. Furthermore, it is expected that E-Town Capital will help NIO to build or to find third-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.
Second, in April 2018, the company established a joint venture company, GAC NIO, together with NIO Capital. Guangqi 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. A week ago, GAC NIO released a new brand, Hycan Hechuang, and plans to launch the first vehicle model this year. We expect to work strategically with GAC NIO and leverage each other's strengths in technology, supply chain, and service networks. Third, 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 IR 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 Wang, 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 first 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 first quarter of 2019 were RMB 1.6 billion, or $243.1 million US dollars, representing a decrease of 52.5% from the fourth quarter of 2018. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the first quarter of 2019 were RMB 1.5 billion, or $228.8 million US dollars, representing a decrease of 54.6% from the fourth quarter of 2018.
The decrease in vehicle sales over the fourth quarter of 2018 was attributed to accelerated deliveries of the ES8 in the fourth quarter of 2018 in anticipation of EV subsidy reductions in China in 2019, as well as the seasonal slowdown surrounding the Chinese New Year holidays in the first quarter of 2019. Other sales in the first quarter of 2019 were RMB 96.0 million, or $14.3 million, representing an increase of 76.4% from the fourth quarter of 2018. The increase in other sales over the fourth quarter of 2018 was mainly attributed to increased revenue derived from NIO Life merchandise and services provided in the first quarter of 2019. Cost of sales in the first quarter of 2019 was RMB 1.9 billion, or $275.7 million, representing a decrease of 45.9% from the fourth quarter of 2018.
The decrease in cost of sales over the fourth quarter of 2018 was mainly driven by the decrease of delivery volume of the ES8 in the quarter. Gross margin in the first quarter of 2019 was negative 13.4%, compared with positive 0.4% in the fourth quarter of 2018, mainly driven by the decrease of vehicle margin in the quarter. More specifically, vehicle margin in the first quarter of 2019 was negative 7.2%, compared with positive 3.7% in the fourth quarter of 2018. The decrease in vehicle margin was mainly driven by the decrease of delivery volume of ES8 in the quarter. Research and development expenses in the first quarter of 2019 were RMB 1.1 billion, or $160.7 million, representing an increase of 55.4% from the first quarter of 2018 and a decrease of 28.8% from the fourth quarter of 2018.
Excluding non-GAAP share-based compensation expenses, research and development expenses were RMB 1.0 billion, or $155.9 million, representing an increase of 52.7% from the first quarter of 2018, and a decrease of 30% from the fourth quarter of 2018. The decrease in research and development expenses over the fourth quarter of 2018 was primarily attributed to the higher design and professional expenses incurred in fourth quarter of 2018 to support a frequent test research and development stage of the ES6, our five-seater, high-performance, premium electric SUV launched in December 2018. Selling, general, and administrative expenses in the first quarter of 2019 were RMB 1.3 billion, or $196.7 million, representing an increase of 71.5% from the first quarter of 2018, and a decrease of 32.2% from the fourth quarter of 2018.
Excluding non-GAAP share-based compensation expenses, selling, general, and administrative expenses were RMB 1.2 billion, or $183.9 million, representing an increase of 67.6% from the first quarter of 2018, and a decrease of 32.4% from the fourth quarter of 2018. The decrease in selling, general, and administrative expenses over the fourth quarter of 2018 was primarily attributed to decreased marketing and promotional activities and decreased expenditures on outsourcing professional services. Loss from operations in the first quarter of 2019 was RMB 2.6 billion, or $390.0 million, representing an increase of 78.8% from the first quarter of 2018, and a decrease of 24.1% from the fourth quarter of 2018. Excluding share-based compensation expenses, non-GAAP adjusted loss from operations was RMB 2.5 billion, or $372.2 million, representing an increase of 75.7% from the first quarter of 2018, and a decrease of 24.4% from the fourth quarter of 2018.
Share-based compensation expenses in the first quarter of 2019 were RMB 119.6 million, or $17.8 million, representing an increase of 184% from the first quarter of 2018, and a decrease of 15.6% from the fourth quarter of 2018. The decrease in share-based compensation expenses over the fourth quarter of 2018 was primarily attributed to the decrease of share-based compensation expenses related to certain directors and executive officers. Our net loss was RMB 2.6 billion, or $390.9 million, in the first quarter of 2019, representing an increase of 71.4% from the first quarter of 2018, and a decrease of 25.1% from the fourth quarter of 2018.
Excluding share-based compensation expenses, adjusted non-GAAP net loss was RMB 2.5 billion, or $373.1 million, in the first quarter of 2019, representing an increase of 68.2% from the first quarter of 2018, and a decrease of 25.5% from the fourth quarter of 2018. Net loss attributable to NIO's ordinary shareholders in the first quarter of 2019 was RMB 2.6 billion, or $395.2 million, representing a decrease of 32.8% from the first quarter of 2018, and a decrease of 24.6% from the fourth quarter of 2018. Excluding share-based compensation expenses, an accretion on redeemable non-controlling interest to redemption values, adjusted net loss attributable to NIO's ordinary shareholders on a non-GAAP basis was RMB 2.5 billion, or $372.7 million. Basic and diluted net loss per ADS in the first quarter of 2019 were both RMB 2.56, or $0.38.
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 2.42, or $0.36. Our balance of cash and cash equivalents, restricted cash, and short-term investment was RMB 7.5 billion, or $1.1 billion, as of March 31st, 2019. On January 1st, 2019, the company adopted ASC 842 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. Now for our business outlook. For the second quarter of 2019, the company expects deliveries to be between 2,800 and 3,200 vehicles, representing a decrease of approximately 19.8% to 29.8% from the first quarter of 2019. This outlook incorporates the planned delivery of several hundred ES6 in June 2019.
The company also expects second quarter total revenue to be between RMB 1.1 billion and RMB 1.3 billion, or between $169 million and $193 million. This would represent a decrease of approximately 20.7% to 30.5% from the first quarter of 2019. This concludes our prepared remarks. I will now turn the call over to the Operator to facilitate our Q&A sessions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star and the number 1 on your telephone and wait for your name to be announced. To cancel the 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, you can re-enter the queue. Once again, please press star 1 for your questions. Your first question comes from the line of Bin Wang of Credit Suisse. Please go ahead.
Hi. Thank you so much for taking my questions. I have 3. The first 1 is about the ES6 order. Actually, you said that in the past 5.5 weeks, we got around 5,000 orders. We recall in the conference call in the year 2018 result, you mentioned already you have 7,000 orders by around early March. There is around 1 month in between. It seems that in that 1 month, not much orders were received. Can you explain why in that 1 month, not much orders for ES6? That's the number 1 question. Number 2 question is about your recent announcement about NIO China. Can I know what is the specific arrangement? It seems under this call will be another joint venture between NIO Inc. and E-Town. What will be the asset injection into this NIO China? Asset detail, please.
Number 3, can you confirm whether your full-year volume guidance changed or not? I remember your full-year volume guidance is 40,000 units. It's more than 20 something that were ES6. Can you remind us your full-year volume guidance? Thank you.
Hey, Bin Wang, this is Louis. I will take 1 and 3, and I will let William and Nick answer 2. For 1, we had 7,000 something preorders for ES6. Do not forget, those orders are refundable. During that month before the Auto Shanghai, there was 1,000 or so plus, I cannot remember the exact number, who also got a refund on their order. What we are talking about is new orders from April, I guess 17th or 18th, when the Auto Shanghai started until yesterday. Those 5 weeks. Do not forget, there is also cancellations in orders, so it is a moving target. It is very encouraging to see 5,000 new preorders in only 5 and a half 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 three, 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 RMB 67,000 down to under RMB 40,000 and going to RMB 11,000 ES8 soon. 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. We'll be in a better position to give full-year targeted numbers. It's unofficial, but targeted numbers, in a couple of months once ES6 is launched. Then William and Nick, you want to take the E-Town question?
继续发展的资金来说是非常重要的。当然现在还是框架协议，两个团队都还在就最终的交易文件，还有很多的工作要做。目前来讲，太多的细节目前还不太方便，还有很多细节还需要进一步讨论。有更新的消息我们会及时跟大家更新。谢谢王斌。
Bin Wang, thank you for your question. Regarding our recent announcement about our framework agreement with the E-Town International Investment and Development Company, which is E-Town Capital. Actually, E-Town Capital will be helping us through its third party partners and also its affiliated entities to inject about RMB 10 billion in exchange for the minority equity stake for the NIO. At the same time, NIO will be establishing NIO China in the BDA E-Town. We will be relocating part of our major business to this NIO China. Still, NIO Inc.
will be holding most of its control over the NIO China, NIO China will be part of our consolidated statements. NIO China will be an important channel and tool for our RMB fund raising, because through our public in the NYSE, we have a very diverse fund raising channel for the USD. With the NIO China, we can diversify our fund raising channel for the RMB. With both fund raising channels, I think it will help us to sustain our future development for the second generation platform. The team is now working with E-Town on the details of this definitive agreement, there will be a lot of details that need to be refined, we will keep you guys updated on this news.
Thank you. Our next question comes from the line of Wei Fan of CICC. Operator, your line is open.
Okay, thank you for taking my question. My first question is also about NIO China. If E-Town will become a minority shareholder of NIO China, besides the term dealing fresh capital, what can NIO expect from E-Town? Will NIO set up manufacturing capability in Beijing? Do you still prefer the outsourcing, or turn to the in-house manufacturing in the future? That's the first question. 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. The third question is about NIO and GAC NIO. Will this JV in the future generate any cash flow to NIO, and what is synergy between NIO and GAC NIO? Thank you.
William，你想要先回答三个问题吗？
好。谢谢冯伟。第一个问题，我们和亿庄国投的框架协议里面说到了，亿庄国投会帮助协助我们，或者一起去找第三方，在北京的经济开发区，就是亿庄那边建设生产下一代产品的工厂。当然从大的方向上来讲，我们还是会优先去做第三方制造的模式。因为从目前来讲，我们和JAC的合作模式对我们来说是一个非常高效的模式，无论是从投资还是从生产管理的角度来讲，我们认为这个还是我们坚持的一个方向。当然也不完全排除会有自己建厂的可能性。但是我想强调的是，我们现在谈的这个100亿的融资，主要是我们NIO China的一个股权融资，它的主要的用途还是用在研发和我们整个的用户服务体系的建设，不会主要用在工厂的建设上面。这个我想跟大家澄清一下。那第二个问题。
Regarding your first question, the framework agreement that we entered with the E-Town Capital has mainly mentioned that the E-Town Capital will be helping us to find the third party partners to build a manufacturing facilities for our next generation platform products. For the near term, we will be upholding the joint manufacturing model as we are having right now with the JAC, because this manufacturing cooperation 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. For this RMB 10 billion fund raising or equity raising, it is more of a development, research and also the user network requirement.
第二个就是ES6，我们相信ES6它的产品力非常的强，我们目前从全球的媒体的试驾，从用户的试驾，各方面来讲，其feedback都是非常的正面的。那我们在后续的主要的工作，还是要让更多的人来试驾我们的产品，来接触ES6。在这方面，我们有非常积极的一些准备工作。当然我们也会在线上推广方面，也会更加地积极。另外，我们也还在寻求一些更好的线下扩大我们销售渠道的方式。我们当然还是会保持直销的方式，但是我们会在更多的一些合作伙伴那边展示我们的产品，让更多的人来接触到我们的产品，这个也是我们正在做的一些事情。我们相信ES6它进入的是一个更加大的五座的SUV市场，以它的产品力的角度来讲，和汽油车高端的五座的SUV相比，比如说奥迪的Q5、Mercedes的GLC，或者BMW X3相比，我们是有非常强的竞争力的，我们不光是和电动车比。如果看今年一到四月份，我们ES8和高端的七座SUV相比，我们事实上在前三名的一个位置，我们比Volvo的XC90卖得都还要多。不光是和电动车相比，比Tesla Model X销量要多将近一倍。我觉得ES6和同样价位的豪华的汽油车相比，我们也是非常有信心的。所以今年主要的工作还是让更多人了解我们的产品，因为我们对它的产品的竞争力是非常有信心。
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 positive feedback and reviews from these people and participants. For the following months, we will be taking active market campaigns, both online and offline, so that more people can appreciate and understand our products. We will organize more test drives 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.
For ES6, we believe it is a very powerful and strong product compared with the Q5 from Audi, GLC 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 four months of 2019, you will find its sales volume ranked the third place among all the seven-seater premium SUVs. Actually, the sales volume of ES8 has surpassed the volume of XC90 for the first four months this year. The sales volume of ES8 is two times the sales of the Model X from Tesla. For ES6, it will be tapping into a wider market: the five-seater SUV. In this competition, we believe that the ES6 will be outperforming other products, even including the gasoline cars.
第三个问题，GAC NIO我们在5月20号发布了它的新的brand，Hycan合创，它在明年推出它的新的产品。GAC NIO合创，这个是我们很长期的一个战略性的投资，我们相信在将来我们会看到在研发、供应链、服务网络各方面的协同。但是这个需要一些时间，并不是一个马上的行为。但是我们和GAC一起，对于我们这样的一个合作，Hycan这样的合作，我们都还是非常有信心的。但是它对我们的帮助可能还需要一些时间，不一定能立刻地显现，但长期我们是非常有信心。
As for your third question about the joint venture between GAC and NIO, we just announced the GAC NIO's latest brand, that is Hycan [Foreign language], and they will be launching their product next year. This is a very important long-term strategic partnership for both sides. We can leverage each other's strengths in terms of the R&D, supply chain and service network. We can also utilize the synergies. We have confidence with this sustainable and long-term partnership. 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.
我想补充的是，Hycan的产品，它的售价肯定是要低于NIO的这些产品。这也是我们整个NIO进入更大众市场的一种方法。这个我也想补充一下。我们并不是拿NIO的产品直接在这个平台上去进行销售，或者进行复用。从长期来讲，我们会在更有竞争力的、更有成本优势的平台方面，产品平台方面进行合作。
Also for this Hycan, actually the price range of Hycan will be a bit lower than the price range of NIO products. 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 tapping into the wider market. This is another approach for NIO to expand our market presence.
Okay, thank you. Great. 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. Would've expected with the subsidy ready to come down even further in June, that you might have a pre-buy of this product. 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? Nick, you can take the cash burn question for in R&D and CapEx spend. William?
Okay. Yeah. Yeah.
Regarding the question about the competitiveness of the ES6, sorry, ES8. Actually, ES6, sorry, ES8 not only targets at the premium electric SUV, it also aims at the segment of all the premium six and seven-seater SUV, including EV and also the gasoline cars. Our competitors in this segment include Q7 from Audi, GLS from Mercedes-Benz, XC90 from Volvo, and Model X from Tesla. 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 an EV. We also enjoy the preferential policies for the license plate application and usage in cities like Beijing or Shanghai. In the long run, these advantages will help us to offset the impact of the subsidy reduction.
We believe that the ES8 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, I won't call it burn. We actually have a net cash outflow over 4 billion RMB. 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 roughly a half of it. There's a huge working capital gap. A lot of the payments occurs in the months of January and February as well. Working capital is take a significant portion of it. If you look at our expenses item like R&D as well as the SG&A, that actually take some large portion as well. Overall, in moving forward, we think that this cash burn rate gonna go down quarter by quarter, for a couple reasons.
Number one, is actually with the launch of ES6, we're going to bring more volume into the picture. Accordingly, as a result, working capital going to help our cash flow. Number two, 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 costs, cut down unnecessary spending in both the strategic spending R&D by rebalancing our product portfolio and also balancing our self-network spending versus seek some strategic alliance in the channels, we can cut down significantly. In terms of our peoples and the daily operation, we issued a new policy and put the stringent mindset into people's mind. Makes the lean operation concept not only reflect in the number, but also reflect in every minds of our employees.
Hey, Dan, it's Louis. We expect Q2 cash burn to be a little bit high, 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 Faye 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? How is your on track to install NCM 811 batteries? Will Level 2.5 be ready upon the launch? In light of the current environment, do you see opportunities to reduce component prices from suppliers? If so, where do you see most of that, whether it's battery, motor inverter, or others? Thank you.
Thank you, Faye. William, do you want to talk about ES6 specs and the current reduction in price possibilities?
Yeah.
我们目前来看的话，我们NCM 811的量产的计划还是按照我们预计的时间。那我们预计的话，最早的NCM 811的电池在七月份是可以提供给用户。从整体上来讲，我们所有的测试，所有的表现都是非常好的，我们对这个非常有信心。那我们和电池的电芯的和模组的供应商CATL，我们也有非常好的这样一个长期的降低成本的框架。我们是能够看到在三季度和四季度，电池的成本会跟以前有显著的一些降低。那么当然基于我们目前对销量的一个预计，我们和CATL在电池的成本下降方面，我们是已经有一个非常好的这样一个协议，会逐步地降低我们的成本，在三季度和四季度能显著看到这个成本的下降。
About the NCM 811 battery pack, actually, it is proceeding as our schedule. It will be available to our users in July. In our validation test, the NCM 811 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. We will be witnessing significant cost reduction in terms of the battery pack from the third and the fourth 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.
Our next-
Dan, it's Louis. I'm sorry. It's Louis. Faye, some of the specs, just which you asked about, the ES6 is very competitive with the likes of Mercedes-Benz 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. Its performance, its communication, its service, everything should be very competitive, if not better. It's priced below all those models, including the Model 3. We think it's a very price competitive car. It looks sporty, it's sharp, and it is full of amenities.
Thank you. Our last question comes from the line of Yan Lin of Deutsche Bank. Please go ahead.
Hi, William, Louis and Nick. Thanks for taking my questions. I've got two quick questions here. My first question is on the future new products. As Louis has just mentioned, it seems like we'll be launching another model in 2020 before the ET series. Could you please share with us your thoughts behind this decision? Also, will this be another SUV model? What sort of market segment are we targeting at? My second question is, as mentioned just now, that demand was negatively impacted by the NEV subsidy cuts. Wondering 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, you want to answer these two?
我们前面已经说到，我们在上海车展的时候，这个ET Preview，我们其实取得了非常好的一个反响。但是我们在经过很长时间的讨论之后，我们还是决定基于NP2去推出我们ET7这个车型。因为我们希望大家理解，在将来的几年，市场汽车的产品，特别是在ADAS和AD以及Smart相关的这样的功能的处在一个很重要的一个变革的时期。这里面涉及到包括sensor，包括计算的单元，包括整车的电子电机的架构，都会在将来几年时间里面会有很大的变化。那我们并不希望基于NP1的架构去推出ET7以后，会在这么重要的一个车型的话，我们会看到它比较快地过时，我们并不希望出现这样的情况。所以我们在经过仔细的讨论以后，我们决定基于NP2的平台去打造ET7，那么也就是说ET7的推出的时间肯定比我们原计划要往后一些，但是我们相信这个对于公司和对于股东来说，对于用户来说，都是最好的一个决策。从另外一方面来讲，我们知道市场肯定期待我们推出新的车型，所以我们在过去的两个季度前，在今年年初，我们已经做了一个快速的决策，就是基于我们基于现在的这个NP1，我们会在明年快速推出一款新的车型，也是非常有竞争力的一款车型。当然今天我们还没有太多的information方面给到大家，但是大家也知道我们在这个产品开发方面的速度是非常快的。所以，我们这款车在明年的下半年，会向市场进行销售。
About the ET7 and also our new product, we launched our ET preview during Auto Shanghai this year, and we have received a lot of positive feedback and review about this ET preview. Actually, earlier this year, we decided that we would like to launch our ET7 on our second generation platform, NP2.
Recently.
Recently, we decided to launch this ET7 on our second-generation platform, NP2, because the next several years will be very important for the transformation of ADAS, AD, and the smartness technologies. You will be seeing the transformation for the sensors, for the computing units, and also for the E/E architecture of the vehicle. We want to see this ongoing transformation. That's why we decided to put the ET7 on the second-generation platform. In terms of the launching time of ET7, it is postponed a little bit. I think this is also the best decision.
Not a little bit.
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. At the same time, we understand that the market is expecting a new product or a new model from NIO. Earlier this year, we decided that on top of the current-generation platform, we would like to leverage our existing technologies to launch a new model next year. 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. You can expect the launch of this new model next year.
第二个问题就是补贴退坡以后的demand的问题。还是那句话，从我们角度来讲的话，我们还是看整个的高端车的市场。那当然ES8、ES6都是在高端SUV的市场。我们不光是看电动车的市场，我们认为ES8和ES6和同样价位的豪华品牌的SUV相比，是有巨大的优势的。那这中间主要的原因还是在，我们包括在消费税，在关税，在购置税方面，这些方面的优势是巨大的。所以，我们车从性能，从智能化的程度，从使用的成本，从我们服务，包括牌照不限行优惠这些方面，我们认为是有非常大的竞争的优势。我们觉得补贴的这个事情对于我们当然会有影响，但这个影响的话，从长期来讲，我们产品的竞争力还是能够保证我们在整个的高端的车的市场里边，每一个细分市场里边，我们能够取得一个好的表现。我想这个是越来越多的人认识到电动汽车的优势，我们还是非常有信心的。所以补贴肯定会有一些短期的影响，但是我们对于长期的，我们和汽油车传统的燃油车的这样一个产品去对比的话，我们是非常有信心的。不光是产品力，也包括服务。
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. 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. We believe that maybe in the short-term, the subsidy cuts may affect us a little bit, but in the long run, we do have the strong market performance in this segment.
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.
Yeah. Thank you. I have two questions. The first one is regarding this new subsidiary, NIO China. Since E-Town, Beijing E-Town, has committed RMB 10 billion just for minority interest in this new entity, does that mean NIO Incorporation is also committed for more than RMB 10 billion investment into this NIO China entity? If so, would this new investment into the NIO China be 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 RMB 41.9 billion to RMB 40 billion, declined by RMB 1.9 billion 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 E-Town NIO China?
Okay. Yeah.
Regarding this NIO China with E-Town, actually, it doesn't mean that we will be investing more than RMB 10 billion into this NIO China in exchange for more equity stock. Instead, if you look at our NIO Inc. current business, actually most of our business, including our employee, including our sales network and our major business are based in China. Over 90% of our employees are based in China. For this existing asset, we already have a very high and good valuation. This is how we work with this NIO China. We will be leveraging this existing asset and business for the equity fundraising. Thank you.
It's actually more appropriate to understand it in the way you give some minority shares to Beijing E-Town, they paid in RMB 10 billion as investment into this entity. It's kind of in a form of further finance through equity.
Yeah, that's correct.
That's actually from E-Town and it's affiliated. Yeah.
Okay.
I'm going to address your second question, Paul. Essentially, this reduction on equity portion, RMB 1.9 billion, strictly related to the convertible bond that we issued back around the end of January, early February. In this bond, I can explain a little bit more detail. There's two derivative product. One is called a prepaid forward. The other one is additional call option. If you understand the fundamental structure, initial structure of a convertible bond, it's actually a face value plus 30% the price over the other stock price at the time of issuance. On top of it, we actually put additional call option, which raised the stock price, the strike price from 30% to 100%. That take roughly RMB 80 million. The other one is the prepaid forward capital.
Essentially, we used part of the proceeds from this debt issuance to buy back some of the stock and to sweeten the deal essentially. Make this transaction completely completed. Overall, this has actually resulted in the reduction in our equity positions of RMB 1.9 billion as you can find 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.