Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's 4th Quarter and Full Year 2018 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, Christian. Good evening and good morning, everyone. Welcome to NIO's 4th quarter and full year 2018 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have in Beijing Mr.
William Li, Founder, Chairman of the Board and Chief Executive Officer and in Hong Kong, Mr. Louis Hsieh, our Chief Financial Officer and Mr. Nick Huang, our VP of Finance. Louis and Nick will begin with prepared remarks, and William will join for the Q and A session. 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 1990 5. 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 the 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 reconciliation of unaudited non GAAP measures to comparable GAAP measures.
With that, I will now turn the call over to our CFO, Mr. Louise Xie. Please go ahead.
Thank you, Jade. Hello, everyone. Thank you for joining us today. We are pleased to report our Q4 and 1st full year results as a public company. Our results reflect broad based accomplishments across our organization and provide us with a strong base for moving forward in 2019.
I'll begin with some highlights. In Q4 2018, production continued to ramp for our NIO manufacturing site and we delivered 7980 ES8s during the quarter to bring our total deliveries to 11,348 units for 2018, which helped strengthen the ES8 brand and solidified our leadership position among premium electric 7 seater SUVs. Revenues increased 134% sequentially from the Q3 and total revenue reached RMB4.95 billion for the 1st year following our initial deliveries in June 2018. In December 2018, we launched the ES6, our 5 seater high performance premium electric SUV as well as the 6 seater ES8 version, the 7 passenger SUV in the past. Now, I'd say we have a 6 seater version.
These launches exemplify our focus on continued market penetration through enhanced products and services. We remain confident in our growth prospects in the coming year. We expect a greater than anticipated sequential decrease in deliveries in the Q1 of 2019, partially due to accelerated deliveries made in the end of last year in anticipation of EV subsidy reductions in China in 2019. Number 2, seasonal slowdown surrounding the January 1 and Chinese New Year holidays. Number 3, soft macroeconomic conditions in China, particularly in the auto sector.
As a result, we expect ESA deliveries in the first quarter to total between 3,503,800 units. And we have completed 1805 and 811 deliveries in January February, respectively. In 2019 sorry, by the end of February 2019, we had over 4,200 orders for ES8 with RMB5000 deposits and RMB45000 production order payments. Going forward, we will no longer report the pre order number for ES8 as deliveries of ES8 enters a shortened more normal stage of delivery times. Furthermore, going forward, we will report delivery numbers each quarter rather than giving monthly updates.
We expect deliveries in the Q2 2019 to reflect continued weakness as we await the results of the 2019 EV subsidy policy in China and improvements in the macroeconomic conditions. We continue to monitor policy changes in support of the EV industry and the subsidies offered to buyers of electric vehicles. Yesterday, on March 5 in China, the Chinese Central Government announced a reduction in the VAT tax from 16% to 13% for manufacturing industries as part of the overall tax reduction and information plan to boost the macro economy. We believe these measures will benefit the overall economy and consumption markets in the long term, including the auto industry. On another positive note, in mid December, we were excited to officially launch our ES6 with a pre subsidy price starting from RMB358,000.
We are confident that the competitive features and prices of the ES6 will lead to significant interest in the mass market. ES6 5 seater SUV possesses exceptional performance with acceleration from 0 to 100 kilometers an hour in as fast as 4.7 seconds. Exceptional range of 510 kilometers in EDC and a fully featured luxurious interior. As of the end of February, we had already received over RMB 7,300,000 pre orders. We plan to generate additional interest in the ES6 through participation in the high profile Shanghai Auto Show in April.
We expect this order backlog to increase as ES6 show cars are delivered to our NIO houses in May. As potential buyers can actually see, touch and test drive and experience ES6's driving performance and comfort. As of the end of February, we have made good progress in preparing the productions for the ES6. We are on track to achieve our goal to begin deliveries in June of 2019. The geographic reach of NIO's users continues to expand.
Through the end of February 2019, our ES8 model has been delivered to 270 cities connecting users across the country. With over 14,000 ES8 now on the road, we continue to receive valuable feedback from users. Positive feedback remains brisk in key areas including driving function, interior quality, NOMI interaction, superior service and user engagement. During the 1st winter, we heard from users about drive range challenges with the ES8 for long distance trips. Although our cloud data indicates that 95% of ES8 usage is in the city driving and only 5% is related to long distance travel, we accelerated our efforts to expand our highway power swap station network, covering both the G2 and G4 expressways as well as the majority of the G15 expressway.
Now NIO users can travel between Beijing, Shanghai and Shenzhen without stopping for hours to recharge simply by using NIO battery swap Centers, which provide a fully swapped battery within 5 minutes. NIO is the only company with battery swap technology to enable seamless long distance driving in China, China's main highways at ES8 akin to ICE cars in refueling convenience. Reflecting our drive for continuous improvement, we continue to update and offer software to improve our user experience. Utilizing our over the air technology, in December, we upgraded our ES8 software to version 1.2.0. Over 200 functions have now been added to optimize to provide enhanced safety, driver convenience and improve the overall driving experience since our first software version launched in June.
Key among these include ADAS functions such as automatic emergency braking, forward collision warning and lane departure warning. We target additional major functions in the first half of twenty nineteen. Our service network continues to grow. As of the end of February 2019, we opened 13 NIO houses and 16 pop up NIO Houses in 27 cities across China. In addition, by year end, our number of service centers increased to 100 and 66 cities, mainly composed of authorized service centers.
We are pleased to report on worry free service package continues to receive rave reviews and continue to see about 90% of our users purchase the worry free service packages. We continue to monitor how users are utilizing available power solutions. As of the end of February 2019, approximately 78% of users have installed the home chargers, which are the most efficient and convenient charging solution for their daily usage. We also completed over 38,000 one click power service touching 64% of users. Our power swap stations were also utilized actively in cities and on highways by 32% of our users.
Add to this, the more than 170,000 public chargers identified through our NIO app were utilized by 59% of our users. And it is clear our users are well served by flexible and growing charging infrastructure. We'll continue to monitor usage trends and evaluate our feedback as we continue to improve and enhance available power solutions. In China, the Chinese New Year is the busiest travel season of the year. This year between January 28 to February 18, the heart of the holiday travel period, we provided over 16,000 one click power services to our users, which earned a satisfaction rating exceeding 4.9 out of 5 in the post service surveys.
We are proud of our NIO Power and NIO service teams for their hard work to provide seamless exceptional support in ES8 users on the road across the country. Delivering a holistic user experience that exceeds expectations is a key competitive differentiation and one that creates significant barriers to potential competitive entrants. Because of this, we continue to think beyond the delivery of our vehicles to ensure that NIO service and NIO Power provide the highest quality service to the NIO community. Our NIO community continues to expand beyond our users who purchase ES8. Our online NIO community is growing fast with the NIO app recording over 800,000 active users and 190,000 daily active users on peak days.
A highlight of 2018 for NIO community was our annual NIO Day. In December, we hosted the flagship NIO Day event in Shanghai and welcomed over 10,000 members of the NEO community to share insights into our vision for the future as well as officially launching the ES6. This event has now been viewed online over 1,500,000,000
times.
Through a variety of offline activities in 2018, we've gained valuable experience in data and with the continued rolling out more offline activities to attract target users in 2019. On a separate note, we would like to give you an update on our plan for building the manufacturing facilities in Jiading, Shanghai. In 2017, we signed a framework agreement and memorandum with the government and related entities in Jiaoding, Shanghai to build a manufacturing plant for NIO. Recently, we have agreed in principle that these contractual counterparties with our contractual counterparties to terminate the plan of this manufacturing plant. These decisions are made based on two reasons.
1st, in 2018, a new policy was issued by the government authorities, which allows and encourage the entities that operate its vehicle research, development and design to work with vehicle manufacturing companies to manufacture vehicles cooperatively. This joint manufacturing model between NIO and JAC endorsed and perceived as an innovative manufacturing model in China. Secondly, through an efficiency perspective, we can leverage the existing capacity of NIO JAC plant and enjoy the flexibility to expand the capacity to support NIO's market penetration and growth plans for the next 2 or 3 years. In the long run, we will still focus on joint manufacturing model and continue improving the effectiveness of capital investment in manufacturing. 2019 is an important year for NIO as we have a full year of production of the ES8 and begin deliveries of the ES6.
While soft economic conditions may temper demand for some segments of the auto industry, in China the EV segment is expected to continue to grow. Our goals in 2019 center around increasing market penetration, while effectively improving our production and operation efficiency. Longer term, we are committed to investing in the research and development to ensure our products and services and experiences remain in the forefront of the EV industry and exceed our users' expectations. As we complete our 1st 6 months as a public company, I would like to thank the growing NIO user community for their ongoing trust, the diligent NIO team for their commitment to our vision and the investor community for your interest and support of this journey with NIO. Thank you again and I will now turn the call over to our Vice President of Finance, Nick Huang to provide the financial details for the quarter.
Nick, please.
Thank you, Louis. As Louis mentioned, we concluded 2018 on a strong note. I will now go over some of our financial results for the Q4. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for our full year results and other additional details. Total revenues in the Q4 of 2018 were RMB3.44 billion or $499,700,000 representing an increase of 133 0.8% from the Q3 of 2018.
Our total revenues are made of 2 parts: vehicle sales and other sales. Vehicle sales in the Q4 of 2018 were RMB3.38 billion or $491,800,000 representing an increase of 137 percent from the Q3 of 2018 and accounted for 98 percent of total revenues in quarter. The increase in 4th quarter vehicle sales over the Q3 of 2018 was attributed to accelerated deliveries of ESA in the quarter. Other sales in the Q4 of 2018 were RMB54.4 million or $7,900,000 representing an increase of 27.5 percent from the Q3 of 2018. The increase in 4th quarter other sales over the Q3 of 2018 was mainly attributed to increased revenue recognized from the phone chargers installed and service provided in Cost of sales in the Q4 of 2018 was RMB3.42 billion or $497,700,000 representing an increase of 115.8 percent from the Q3 of 2018.
The increase in cost of sales over the Q3 of 2018 was mainly driven by the increase of delivery volume ESAs in the quarter. Gross margin in the Q4 of 2018 was positive 0.4% compared with negative 7.9% in the Q3 of 2018, mainly driven by the increase of vehicle margin in the quarter. Vehicle margin in the 4th quarter was positive 3.7% compared with negative 4.3% in the Q3 of 2018. The increase of vehicle margin was mainly driven by the increase of production and the delivery volume of the ESA in the quarter. Research and development expenses in the Q4 of 2018 were RMB1.52 billion or $220,400,000 representing an increase of 83.8 percent from the Q4 of 2017 and an increase of 48% from the Q3 of 20 18.
The increase in research and development expenses over the Q3 of 2018 was primarily attributed to an increased number of personnel and the increase in design and professional expenses related to research and development activities of the ES6, a 5 seater high performance premium electric SUV launched in December 2018. Excluding share based compensation expenses, a non GAAP measure, 4th quarter research and development expenses were RMB1.49 billion or $217,400,000 representing an increase of 83.1 percent from the Q4 of 2017 and an increase of 57.8 percent from the Q3 of 2018. Selling, general and administrative expenses in the Q4 of 2018 were RMB1.95 billion or $282,900,000 representing an increase of 130% from the Q4 of 2017 and an increase of 16.5% from the Q3 of 2018. The increase in selling, general and administrative expenses over the Q3 of 2018 was primarily attributed to increased marketing and the promotional activities, increased expenditure on rental and other expenses related to the sales network expansion, and an increased number of selling, general and administrative employees. Excluding share based compensation expenses, a non GAAP measure, selling, general and administrative expenses were RMB1.83 billion or $265,500,000 representing an increase of 123.5 percent from the Q4 of 2017 and an increase of 38.1 percent from the Q3 of 2018.
Loss from operations in the Q4 of 2018 was RMB3.45 billion or $501,300,000 representing an increase of 100 and 6.4% from the Q4 of 2017 and an increase of 22.7% from the Q3 of 2018. Excluding share based compensation expenses, adjusted loss from operations, a non GAAP measure, was RMB3.31 billion or $480,700,000 in the 4th quarter, representing an increase of 102.4 percent from the Q4 of 2017 and an increase of 39% from the Q3 of 2018. Share based compensation expenses in the Q4 of 2018 were RMB141.7 billion or $20,600,000 representing an increase of 282 0.6% from the Q4 of 2017
and a
decrease of 67.2% from the Q3 of 2018. The increase in share based compensation expenses over the Q4 of 2017 was primarily attributed to increased option granted to employees in 2018. The decrease in share based compensation expenses over the Q3 of 2018 was primarily attributed to the higher cumulative share based compensation expenses recognized in the Q3, which was related to the satisfaction of stock options granted pre IPO to certain employees with the performance condition of an IPO. Net loss was RMB3.5 billion or $509,500,000 in the Q4 of 2018, representing an increase of 106.1 percent from the Q4 of 2017 and an increase of 24.6 percent from the Q3 of 2018. Excluding share based compensation expenses, adjusted net loss, a non GAAP measure was RMB3.36 billion or $488,900,000 in the Q4 of 2018, representing an increase of 102.1 percent from the Q4 of 2017 and an increase of 41.3% from the Q3 of 2018.
Net loss attributable to NIO's ordinary shareholders in the Q4 of 2018 was RMB3.52 billion or 511.5 $1,000,000 representing an increase of 26.4 percent from the Q4 of 2017 and a decrease of 64% from the Q3 of 2018. Excluding share based compensation expense and accretion on redeemable non controlling interest to redemption value, adjusted net loss attributable to NIO's ordinary shareholders, a non GAAP measure, was RMB3.34 billion or $486,200,000 for the 4th quarter. Basic and diluted net loss per ADS in the 4th quarter were both RMB3.37 or RMB0.49 per ADS. Excluding share based compensation expenses and accretion on redeemable non controlling interest to redemption value, non GAAP adjusted basic and diluted net loss per ADS were both RMB3.2 or RMB0.47 per ADS in the Q4. Our balance of cash and cash equivalents, restricted cash and short term investment was RMB8.35 billion or $1,210,000,000 as of December 31, 2018.
And now for our business outlook. For the Q4 of 2019, the company anticipates a sequential slowdown in vehicle deliveries compared to the Q4 of 2018 due to accelerated delivery made at the end of last year in anticipation of EV subsidy reduction in China in 2019. The seasonal slowdown surrounding the January 1 and the Chinese New Year holidays, as well as the current moderate macroeconomic conditions in China. For the Q1 of 2019, the company expects deliveries of the ESA to be between 3,500 and 3,800 vehicles, representing a decrease of approximately 56.1% to 52.4 percent from the Q4 of 2018. The total revenues to be between RMB1390.9 million and RMB1515.7 million, or between $202,300,000 $220,500,000 a decrease of approximately 59.5 percent to 55.9 percent from the Q4 of 2018.
This business outlook reflects the company's current and preliminary view on the business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q and A session. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Your first question today comes from the line of Dan Galves from Wolfe Research. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions. I was hoping that you could talk a little bit about your expectations for the government EV subsidy policy in 2019? When do you expect this to be announced? What are some of the positives and negatives?
Will your the bigger 84 kilowatt hour battery help offset some of the reduction? And finally, do you expect more cities in China in 2019 to put restrictions or quotas on internal combustion vehicles?
Thank you, Dan. William, do you want to answer this question?
Yes, I can. So, thanks for the question. I will speak in Chinese and Ruho will help me to translate.
Right now, we haven't received any official announcement from the government regarding the subsidy policies in 2019. And we expect that it will be announced officially recently. For the overall direction, although we haven't received any official announcement, we believe that compared with last year, the subsidy policy in 2019 will be decreasing significantly. But if we look at the positive side, as mentioned by the Chinese government yesterday, they will be keeping supporting NEVs development, especially the support in terms of the taxations. For the NEV, especially for the pure electric vehicles, there is no need to pay the purchasing tax for the buyers.
And we believe that this support in the taxation will be continued. And we also believe that the advantages of the consumption tax on the electric vehicle will also continue. And for NIO, our product positioning taps into the premium segment compared with other entry level brands and models, we will receive very limited effect from the decreasing subsidy. And on the other hand, we do receive a lot of advantages with the taxations. So in the long run, we will be in the advantageous position.
And another advantage of decreasing subsidy is that before we will before we have to deduct the subsidy for our users and we need to wait for the subsidy from the government and it takes a very long time to wait for the subsidy from the government. And we need to pay some advancement payments. And after the subsidy decreases actually we receive since we receive more advantages with the taxations actually it will help us to release the pressure of the cash flow. And in the long run, I believe that the Chinese policies will be supporting the EV's development. And I have this thought from 2 perspectives.
The first is that there will be a lot of benefits in terms of the use of electric vehicles. For example, the EV can drive freely in Beijing and in Shanghai we have advantages with the license plate applications of EV. And I believe that more cities will be enacting this kind of EV friendly policies in the future. And secondly, we do receive a lot of benefits with the taxes. And for NIO as we are a premium brand, I believe this will help us to expand our market, especially we can take up the market shares of users who used to be the ICE card users.
So I'll sum up. In the short term, especially in the Q2 this year, we will be facing some pressures. But the pressures on ourselves is much lesser than the pressure on other electric vehicle companies. And in the long run, we believe that we will keep receiving the benefits and advantages from the policies. And this will help us to expand our markets.
Thank you, William. Dan, also, as far as your other question, Hainan Island has now enacted restrictive license plate restrictions. So Tanya and Haikou are also joining that list. So we expect many more cities in the coming years to restrict the ICE license plates in those cities to prevent pollution and to move toward electric car future. Thank you.
Next question? That's it.
Okay. Your next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking my question. I would like to explore a bit more the implications of not building the wholly owned assembly plant in Shanghai. Presumably, this could have a very positive implication for return on invested capital. Could you talk too about the potential impact on earnings relative to pursuing a wholly owned relative to not pursuing a wholly owned approach?
And then is there anything to think about the potential timing of expected future models? Does this development have the potential to either delay or perhaps even accelerate the timing of when additional models might launch beyond the ES8 and ES6?
Okay. Thank you, Ryan. This one, I'll let William answer this. He's the most familiar with the plant situation. William, you want to go?
Okay.
Thanks for the question.
As we all know last November the MIT has enacted a very important file called number 15 file. And in this file, it stated that the Chinese government endorsed the cooperation between the car R and D companies like NIO with the existing manufacturing companies or manufacturing plants. That means that the cooperative mode between NIO and JAC is endorsed by the Chinese government. Of course, a lot of details regarding this document still need to be finalized and we expect that on the 1st June, the details and this document will be finalized officially and it will be opening for the applications and approval procedures. And the advantages for NIO is that, first of all, we don't need to apply for the subsidies or the carbon emission credit via JAC, we can directly apply this from the government.
And secondly, for NIO as an independent car companies, we can manage our products very well and this will be helping us with our long term strategic planning. And we receive a lot of benefits from this. And with this, we can review and replan our investment in the manufacturing and we can also improve the management efficiency of manufacturing. So in the long run, we will be upholding this manufacturing cooperative mode. At the moment, JAC is our only manufacturing partner and in the future in the long run we may embrace other partners in this regard and this will also be important part of our long term strategy.
And currently because last year during the second half of last year we've modified our production lines for both ES8 and ES6 production and now the annual capacity of NIO JAC manufacturing site is about 100,000 units per year and recently we've been having some discussions with JAC and we decided that our 3rd model will also be manufactured in this new JAC manufacturing site. Of course to be compatible with the 3rd model, we need to make some investment and modifications in our production lines and we will undertake part of this investment. And in this regard, our cooperative mode with JAC will continue and after the upgrade, the annual capacity of this manufacturing site will be about 150,000 units per year and this can be compatible with the 3 models in the next 2 to 3
years.
And for the follow-up manufacturing plan, we may be working with other manufacturing partners with other manufacturing sites, but we will keep this cooperative mode in the long run, so that we can meet our satisfying capacity. And based on our working experience and cooperative experience with JAC, it takes about 20 months from planning to ramping up to the ideal capacity. And in the future we will also uphold this so that we can meet our capacity demand. And we don't think this will be a bottleneck for the company's development. And also it help us to reduce the capital expenses.
As for the optimization of the 2019 capital expenses because of this termination of Shanghai plant, maybe Louis or Nick, you can share some figures.
Okay. I think based on this change of the strategy, I think it's definitely going to be some short term and mid term saving on the CapEx spending for sure. And over the long run, we believe that this can be translated into a long term higher return on asset as well.
Okay. Thank you. Thank you, Ryan. Next question?
Your next question comes from the line of Nick Lai from JPMorgan. Please go ahead.
Yes. Hi, good morning, William and Nick and Louis. Thank you for taking my question. Just one very simple question regarding pricing strategy. Can we talk about our long term pricing or medium term pricing strategy considering 2 moving parts or 2 moving factors?
One is subsidy cut and the second is potential localization of Model 3 in Q1? Thank you.
Okay. Thank you, Nick. William, do you want to talk about our pricing strategy?
Okay.
And we've committed to adopting a more reasonable pricing strategy instead of just to reduce the price to take up the market share. And for ES8 and ES6, we have battery leasing package or policy, which means that user can get a RMB100000 reduction if they choose this battery leasing service and they only need to pay the monthly fee. And from the number perspective over 70% of our ES8 users have chosen this battery leasing service. So in this regard for ES6 users they only need to pay about RMB258000 before subsidy and they don't need to pay the purchasing tax. And from the pricing perspective, our product can be very competitive in the market.
And we understand that our competitors have several rounds of price reductions recently. They may be facing some competitive pressures, so they need to reduce this price. But I believe or I think this price reduction can damage the brand image and the loyalty of their existing users and consumers. And in the long run, NIO will not tap into NIO will not try to take up a bigger market share by simply reducing the price. Instead, we want to innovate our service mode to improve our user satisfactions and user loyalties and then we can improve our sales and market share.
So I believe with our pricing strategy and the battery leasing service as well as the innovations with our service mode, we can keep our competitive edge in this market. And for this year to improve our brand awareness and market penetration, we will be hosting some test drive events or user experience events, so that we can touch upon more users.
Thank you, William. And Nick, I think in my view, the Tesla price reductions, this is my opinion, I think is in part directly because NIO is already our ES8 is outselling Tesla's top brands, the S and the X, which is why the price reduction was so significant, 15% to 20% is huge. And on Model 3, I think Model 3, the base version, which doesn't even compare close to our ES6 and performance or range is over RMB400000. And as William just said, ours is RMB 258,000,000 if you take the battery lease option to start with. So I don't think it solves the competitive problem for Tesla in China.
Yes. Thank you, William. I was actually referring if we plan to leave MSRP, but thank you for the answer. Thank you.
Yes. So ours is 358, theirs is about 410, the cheapest version. But the Model 3 is a small car, it's not even the same class, right? It's a small sedan. It's like comparing 318i BMW, ours is more like an X5, the ES6.
Our range is 510, their range is about 300 kilometers. Our acceleration is a second faster than theirs. 0 to 60 in 4.7, there's like 5.7 or 5.8. Theirs has a single motor. Ours is dual motor.
So it's not comparable.
Indeed. Thank you. Thank you, Louis.
Thank you.
Your next question comes from the line of Vincent from Deutsche Bank. Please go ahead.
Hi. Thanks management for taking my questions. I have questions on 2 areas. Number 1 is on the longer term counts of sales outlook. Now we noticed that the companies are giving a more conservative guidance for 1st and second quarter.
But does it really change our longer term expectation of around like 40,000 to 45,000 delivery for the full year 2019? And what would be the split between year 6 and year 8? And then a little bit follow-up on the sales outlook is that we recently saw a really, really positive documentary coming off on the 60 minutes of CBS, and I think that really helps to raise the awareness of the brand inside China. I don't I wonder whether the company is trying to leveraging on this publicity to help on the sales and help on the traffic in the new houses. My second question is for the fundraising.
Now congratulations on the successful like convertible raising last month. And my question on this one is that, can we have a rough idea of what is the cost for the options for the issuance? And then the second question is that going forward, is this likely to be the major way of further fundraisings in future? So those are the 2 questions. Thank you.
Thank you, Vincent. This one, I'll take the numbers question. The understanding is our forecast has not changed for 2019. Like I said, as we said, the slower than expected start in Q1 and Q2 will partly be due because the subsidy is normally announced in January in China. This year it's already March.
It hasn't been announced. So that uncertainty and we said the macro. The other thing is don't forget in February is only half a month because Chinese New Year took up the 1st 10 days of holiday. We had some delivery delays in February due to the getting license registration offices open in China. So the 811 is exceptionally low.
So we expect a pickup in March of this year. And as I said, we have over 4,200 orders for ES8 that are in the bank, 5,045,000. 1300 of them are for the 6 seater version of the ES8. The 6 seater version won't be open won't be available till Q2. So it's not the slowdown isn't as pronounced as it looks from the numbers.
So I appreciate that question, Vincent. On the 60 Minutes article, it's great publicity in the U. S. And outside. Unfortunately, 60 Minutes isn't shown in China, but it's a very positive view of William's strategy and vision for the company.
On fundraising, the convertible bonds had a premium, it's a little bit higher than we'd It is this coupon is 4.5%. It's a 5 year CB with 3 year put. I don't think CB will be the primary source of fundraising for us in the future. We have many other sources of fundraising. We have enough cash to launch ES8 and ES6.
But as you know, because of a car company's nature, we will need to tap the capital markets at some point in the future. We also have credit lines available to us. We have a lot of strategic interest in investing in NIO through partnerships and others. And also, we have the ability through credit financing on the battery lease receivables we get in others to generate a significant amount of cash from our battery leasing and other revenues. Do you want to talk about fundraising more?
Yes. Actually, there's 2 points I just want to add on top of what Louis just mentioned. Essentially, you're asking about the structure of the CV. In this transaction, I think there are 2 elements of the derivative financial structure in derivative nature. 1 is a capital upper strike.
That's basically show the management's company's confidence over the long run, especially the high appreciation of stock price. That's basically in that element, that basically increased our stock price from 27.5% to 100%. The other element as we call it, the 0 strike forward shares essentially allow the company to purchase back some shares and make these shares lendable to the potential CB investor in the marketplace. There's a typical practice in the market in the CB market.
Okay? Thank you. Thank you, Vincent. Did that answer your question, Vincent? But basically our forecast remains unchanged.
There may be slightly more ES6 orders since we're already at 7,300 3 or 4 months before launch. So we think that's a very strong number. And then ES8, I think, will Q2 should be better than Q1. But I think ES8 is already the number one selling premium EV and 7 seater EV in the market already. So it's already outselling the Model X by a wide, wide margin.
The market leading position. Next question?
Next question comes from the line of Fei Fang from Goldman Sachs. Please go ahead.
Hi, good morning. Thanks for taking our question. It's very impressive to see the ramp up of ES8's volume and your brand. Can management talk about the operational lessons that you have learned from branding ES8? What have worked?
What have not? And what do you plan to do differently for ES6 and the 3rd model? And also for ES6, how do you think about the cannibalization risk with ES8? Thanks.
Thank you, Fei. William, do you want to talk about the lessons you've learned from branding ES8 and any cannibalization against ES6 with ES6 cannibalizing ES8? Yes.
Okay. Thanks for the question.
ES8 is our first product and from manufacturing to delivery in terms of the readiness of supply chain, quality and the software, we need to improve a lot. And for the past 6 months, we've experienced a lot of challenges. And some days we need to manufacture at least 100 or 200 cars and we need to deliver that many cars every day. And this is a huge pressure for us. And I get to say we have overcome that period of time.
And I will appreciate our team for this great contribution. And as of today, we've delivered cars to 2 70 cities in China and the geographical distribution of our users is quite wide. We even have users in the Northeast China, which is one of the coldest areas in China, and which means that we also faced some pressures with our service. I cannot say this is a lesson learned, but for the last quarter for the Q1 last year, we do paid a lot of attention with the user experience, For example, to guarantee a smooth car usage and experience in the winter, we spend a lot of time with the user services in these areas. And also because we didn't want to keep our users waiting for such a long time, we have some intensive user deliveries.
And for these for what we got from the past quarter, we think we can further improve our efficiencies with the service and the service operations. And I believe this will be a long term target and this will help us to further improve our user satisfactions. And starting from this year, we believe that NIO has entered into the 2nd phase of a competition. We call it the qualifying round. And the priority of this round is that we need to improve our operation efficiency without compromising on the user satisfaction.
This is one of the most important tasks at the moment.
Thank you. Thank you, William. Also I think, Bei, I think in my view, ES6 will obviously will have some cannibalization effect on ES8, but I think that's normal. They're both SUVs, 1 is 5 seater, 1 is 7 seater. But I want to remind you that the 5 seater version, 5 seater SUV market is many times bigger than the 7 seater SUV market, which is very limited in China.
So I think as the potential for ES6 is much larger in orders and is reflected in our half year forecast than ES8. So I think it's inevitable.
Actually, Louis has mentioned one very important information. The market size of the premium 5 seater SUV is 10 times bigger than that of premium 7 seater SUV, which means that the total volume of the 5 seater SUV above the price of RMB300000 is over 1,000,000 units. But that's of yes, 7 seater SUV is only about 100,000 units. And we care a lot about our overall market share instead of just for ES8 or ES6. And for ES6, our target this year is to let more people to know this brand, to know this car and to try this car.
That's why this year we are planning for a wide range test drives around China, so that more users or more potential users can have a try. And for our existing users who have tried or drove ES8 for a while, actually the feedback is quite positive because we understand the demand and the needs of the Chinese users and we are confident about the product we provide to them. And actually NIO has one of the highest user satisfactions and we also keep want to keep improving this user satisfactions. If you read some self generated content on the social media, they have some attractive titles criticizing about NIO's services, competitiveness or our product. But if you look at the real user feedback, you will find that the feedback from our users are quite positive.
And in the long term, I believe this is a foundation to our future competitiveness.
Thank you. Thank you, William. Next question?
Your next question comes from the line of Paul Gong from UBS. Please go ahead.
Yes, sure. Thanks for taking my question. My first question is regarding your strategy after this subsidies decline, say, how much percentage you could pass this shortfall to your customers or you plan to pass? If the subsidy declines by $100 how many dollars do you expect the customers might pay as an extra to make up this shortfall?
William, you want to talk about the subsidy effect on our pricing, the fall on the subsidy, you want me to do it?
Yes. So I'll confirm the question.
There are 2 types of
Go ahead. Sorry.
Do you need translation? Sorry. There are 2 types of subsidy. 1 is national subsidy, 1 is local subsidy. Actually, it is not very easy for some users in some cities to get local subsidy already.
And as for the subsidy decline or reduction, if the subsidy declined by RMB 1, actually user need to pay for that RMB 1. So there is no plan to adjust our price because of this subsidy reduction, which means that if the national subsidy decreases by RMB10 1,000 RMB this year, then users need to pay RMB 10,000 more. And before we received the official announcement of the subsidy policy this year, actually even if the subsidy policy of this year is released, there is no plan to reduce our price to cover this shortfall.
To add to that, I think, our prices are ready for the price and value of performance, ours is already the best in the market with ES6 and ES8. And that's why I think, in my view, that's why Tesla has been aggressively lowering their price because of their market share losses to NIO. And so I think there's no reason for us to take down our price. The subsidy will keep our margins in place. And also with the 3% reduction in VAT tax, that should help our gross margin significantly.
So I think the government policies are actually quite positive for
us. Okay.
Thank you, Paul.
Yes, my second question is regarding the yes. My second question is regarding the ES6 orders. I heard it was 7,300. How does this compare to the ES8 orders at the same stage, say, at the same time last year? What was the cumulative ES8 orders?
Can you share with us?
Yes. I think ES8, at that point was a little bit better because it was the first time NIO had got all this hype for a whole year and it was a big event. So NIO ES8 orders were about 10,000 at this time. But don't forget ES6, we haven't started I mean, we haven't started the marketing campaign yet. This is mostly the referrals of word-of-mouth.
So you'll see us in April when the Shanghai Auto Show takes off, as William had mentioned, having a lot more marketing on ES6. In addition, part of the reason our costs are high for Q4 and Q1 is we are building a lot of ES6s to be available in May for test drives. That's one thing we learned about ES8 is that we didn't have enough cars for people to test drive. It's very hard to test drive a car. And now we have NIO houses in 27 cities.
So we're going to build so there'll be a cost in Q1 to absorb the cost of building a lot of ES6s allowed test drive. When people drive our ES8, the majority of them will buy that car, a vast majority of them. We think the ES6 is even better because the lighter sportier version of the ES8, it drives phenomenally. So we believe that once we start allowing test drives, the order number will go up quite fast in the May, June time frame.
Actually ES6 and ES8 focus on different market and user groups. For ES8, it taps into the premium 7 seater SUV segment and in that segment we don't have many competitors. And also ES8 represents the first official debut and the product launch of NIO and a lot of users who were not potential 7 seater SUV users bought our cars because they love NIO brand. That's why we received more orders than ES6 at the early stage of ES8 product launch. And for ES6, the market situation is different.
It taps into a bigger market, but at the same time the competition is more fierce. For example, we have Q5 GLC X3 in this market segment and their sales volume every month is over 10,000 units. But we are also very confident with our ES6 performance, user experience, the advantages with the Texas and the innovative services. And we believe we can keep this competitive edge in this market segment. We already expected that the early stage of ES6 order is not as good as ES8.
That's why as Louis mentioned, we will be holding large scale test drive campaign and market campaign starting from May. And we believe that in this bigger and more competitive market segment ES6 will be very competitive compared with traditional ICE cars.
Thank you, William. Next question?
Your next question comes from the line of Bin Wang from Credit Suisse. Please go ahead.
Thank you. I actually have 3 operation questions. The number 1 is about NIO House number. I just heard that right now it's 27. So we have been going about 70 by the end of this year.
So I want to know whether you have any change about the plan for NIO House number. That's number one question. Number 2 is about the test actually. We have localized the Model Y next year. Can I assume that ES6 computes Model Y because Model Y has been set at 10% bigger than the Model 3 since then it will computes the Model Y?
So I want to know whether it computes Model Y. Meanwhile, because the Model 3 have such a big success in the U. S, do we have any plan to introduce similar models than the Model 3 for NIO in the future, say, 2021? And the third question is about the software. One of the key things is about so far our ADAS have some still not fully can utilize because of the software well.
You have been guiding software well maybe ready in the May this year. So can we have update about the software when we'll be fully ready to have a much better user experience? And lastly, I also have a question about the battery. Since the ES6 have a better battery, can we know when is the battery can be used, I mean, the same A111 battery can be used to ESA? And when will be used?
If at use, will the price of the ESA will be increased or not? Thank you.
Okay. Thank you, Wang Bin. I'll take one at a time. On NIO Houses, we currently have 13 in 11 cities and 16 pop up NIO Houses. William wanted a large footprint as we launched ES6 and because of the dispersion of the ES8 orders across the cities.
You won't see us go to 70 cities this year. So we realized that the expenses are high. So we are controlling the expenses. So you'll see high expenses in Q1 and then we should see a gradual decline, significant decline in expenses in Q2, Q3 and Q4 as we march toward profitability. So that's number 1.
Think we have pretty good coverage within the 27 cities. We may add a few more, but it won't be a large scale expansion into 70 cities this year. 2nd, Model Y, Model Y was supposed to be some kind of announcement next week. I don't worry about it because it won't be here for a year or so in China if even then. It should be 10% bigger than the Model X is what they said.
It's closer to our ES6. But if the Model X I mean, sorry, the Model 3, sorry, the Model 3. The Model 3 is 400 the cheapest version is RMB 420,000, it's 10% more. That means the Model Y will be over RMB 500,000 when it comes to China in a year or 2. And that will still not be as price competitive with our ES6, which is RMB 358,000.
And that depends on whether you get 1 motor or 2 motors in the Model Y. So I think as our ES6 will compete very well, it should be a slightly bigger it will be an X5 versus an X3, which is what I think the Model Y will be comparable to. So I think our car is more than ready to meet the challenges of Model Y when it comes to China. As far as Model 3 is concerned, we are in discussions about MP2 platform, NIO Platform 2, but that won't we haven't decided on what the format of that will be. So we don't know if we will but there's no immediate plans in the next year to have a car that will compete with Model 3 of that size.
We think ES6 already competes more than favorably with Model 3. Chinese prefer SUVs to sedans and ours is an SUV, Tesla is a small sedan. Sedans are not the preferred choice. 2nd is the model the ES6 is cheaper than the Model 3 and much higher price performance statistics, faster, longer range, much more luxurious. Number the Model 3 is a slim down, no nothing fancy in the interior with not the same service level as ES6.
So I think there are different classes. And I think ES6 should be a much more appealing car to Chinese users. Your question on ADAS software, we the current timing is for highway pilot or NIO highway pilot to be available sometime in Q2. Don't forget the NIO ES8 is already equipped with the ADAS hardware. So for us, once that's available, once we will order that package, we will get a high revenue, a high gross margin number.
So we'll turn it on, on the software side and we'll make over RMB 35,000 to RMB 40,000 by doing that. So we expect NIO pilot, the current timetable is next quarter, it will be released and available for ES8 and ES6 owners. On the battery, 84 kilowatt battery is going to be available for both ES8 and ES6. So ES6 for a cheaper version can use the 70 kilowatt battery as well. And then for ES8 owners who have 70 kilowatt, William and NIO is offering a one time trade in value where you can get 60% off for a 84 kilowatt battery if you want to buy that.
So we are offering it available. It's the same battery pack. So it's swappable. So the 70 kilowatt batteries that are from ES8 that are changed, we will use them in our swap network. So they won't go to waste.
And so we expect that battery to have for the ES6, it takes the range to 510 on the 84 kilowatt. For the ES8, it takes the range from 355 to 420. So that will solve the range issues for that many the biggest complaint from ES8 owners was range. So we expect to have a solution for them by June, July of this year. Does that answer your questions, Wang Bin?
Okay, great. I think it does. Next question, please.
There are no further questions at this time. I'd like to turn the call back over to
the company for closing remarks. Thank you.
Okay. Well, thank you, everyone, for joining us today. We very from William and Nick and Jade and Heather and I and Stanley here in Hong Kong and Beijing, we thank you for your time. We look forward to seeing you in the next call. Thank you.
Thank you.
This concludes this conference call. You may now disconnect your line. Thank you.