Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s fourth quarter and full year 2018 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, Christian. Good evening and good morning, everyone. Welcome to NIO's fourth 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. In Hong Kong, Mr. Louis Hsieh, our Chief Financial Officer, and Mr. Nick Wang, our VP of Finance. Louis and Nick will begin with prepared remarks, and William will join for the Q&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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements invoke 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 US 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 includes discussions of our audited GAAP financial information, as well as our audited non-GAAP financial measures. Please refer to NIO's press release, which contains reconciliation of the audited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CFO, Mr. Louis Hsieh. Louis, please go ahead.
Thank you, Jade. Hello, everyone. Thank you for joining us today. We are pleased to report our fourth quarter and first 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-JAC manufacturing site. We delivered 7,980 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 seven-seater SUVs. Revenues increased 134% sequentially from the third quarter, and total revenue reached RMB 4.95 billion for the first year following our initial deliveries in June 2018.
In December 2018, we launched the ES6, our five-seater, high-performance premium electric SUV, as well as the six-seater ES8 version, the seven-passenger SUV in the past. Now we have a six-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 first quarter 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 two, seasonal slowdown surrounding the January 1st and Chinese New Year holidays. Number three, soft macroeconomic conditions in China, particularly in the auto sector. As a result, we expect ES8 deliveries in the first quarter to total between 3,500 and 3,800 units. We have completed 1,805 and 811 deliveries in January and February respectively.
By the end of February 2019, we had over 4,200 orders for ES8, with CNY 5,000 deposits and CNY 45,000 production order payments. Going forward, we will no longer report the pre-order number for ES8s, as deliveries of ES8 entered a shortened, more normal state of delivery times. Furthermore, going forward, we will report delivery numbers each quarter rather than giving monthly updates. We expect deliveries in the second quarter 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 5th in China, the Chinese central government announced a reduction in the VAT tax from 16%-13% for manufacturing industries as part of the overall tax reduction and information plan to boost the macroeconomy. We believe these measures will benefit the overall economy and consumption markets in the long term, including the autos industry. On another positive note, in mid-December, we were excited to officially launch our ES6 with a pre-subsidy price starting from CNY 358,000. We are confident that the competitive features and prices of the ES6 will lead to significant interest in the mass market. ES6 five-seater SUV possesses exceptional performance with acceleration from 0 to 100 km an hour in as fast as 4.7 seconds. Exceptional range of 510 km in NEDC, and a fully-featured luxurious interior. As of the end of February, we had already received over 7,300 CNY 5,000 pre-orders. Sorry.
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 first 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 five minutes. NIO is the only company with battery swap technology to enable seamless long-distance driving in China. China's main highways of 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 ADAS functions in the first half of 2019. 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 166 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. The more than 170,000 public chargers identified through our NIO app were utilized by 59% of our users. It is clear our users are well-served by a flexible and growing charging infrastructure.
We will continue to monitor usage trends and evaluate our feedback as we continue to improve and enhance by available power solutions. In China, the Chinese New Year is the busiest travel season of the year. This year, between January 28th to February 18th, 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 five 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 to ES8 users on the road across the country. Delivering a holistic user experience that exceeds expectations is a key competitive differentiation. 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 ES8s. 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 NIO 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 1.5 billion times.
Through a variety of offline activities in 2018, we've gained valuable experience and data, and we 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 Jiading, Shanghai to build a manufacturing plant for NIO. Recently, we have agreed in principle with our contractual counterparties to terminate the plan of this manufacturing plant. These decisions are made based on two reasons. First, 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 is 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 two or three 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 experiences remain at the forefront of the EV industry and exceed our users' expectations. As we complete our first six months as a public company, I would like to thank the growing NIO user community for their ongoing trust, the diligent NIO team for the 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 Wang, 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 fourth quarter. 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 fourth quarter of 2018 were 3.44 billion RMB, or $499.7 million, representing an increase of 133.8% from the third quarter of 2018. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the fourth quarter of 2018 were 3.38 billion RMB, or $491.8 million, representing an increase of 137% from the third quarter of 2018 and accounted for 98% of total revenues in quarter.
The increase in fourth quarter vehicle sales over the third quarter of 2018 was attributed to accelerated deliveries of ES8 in the quarter. Other sales in the fourth quarter of 2018 were 54.4 million RMB, or $7.9 million, representing an increase of 27.5% from the third quarter of 2018. The increase in fourth quarter other sales over the third quarter of 2018 was mainly attributed to increased revenue recognized from the home chargers installed and service provided in the quarter. Cost of sales in the fourth quarter of 2018 was 3.42 billion RMB, or $497.7 million, representing an increase of 115.8% from the third quarter of 2018.
The increase in cost of sales over the third quarter of 2018 was mainly driven by the increase of delivery volume of ES8s in the quarter. Gross margin in the fourth quarter of 2018 was positive 0.4%, compared with negative 7.9% in the third quarter of 2018, mainly driven by the increase of vehicle margin in the quarter. Vehicle margin in the fourth quarter was positive 3.7%, compared with negative 4.3% in the third quarter of 2018. The increase of vehicle margin was mainly driven by the increase of production and the delivery volume of the ES8 in the quarter. Research and development expenses in the fourth quarter of 2018 were 1.52 billion RMB, or $220.4 million, representing an increase of 83.8% from the fourth quarter of 2017, and an increase of 48% from the third quarter of 2018.
The increase in research and development expenses over the third quarter 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 five-seater, high-performance, premium electric SUV launched in December 2018. Excluding share-based compensation expenses, a non-GAAP measure, fourth quarter research and development expenses were 1.49 billion RMB, or $217.4 million, representing an increase of 83.1% from the fourth quarter of 2017, and an increase of 57.8% from the third quarter of 2018. Selling, general, and administrative expenses in the fourth quarter of 2018 were 1.95 billion RMB, or $282.9 million, representing an increase of 130% from the fourth quarter of 2017, and an increase of 16.5% from the third quarter of 2018.
The increase in selling, general, and administrative expenses over the third quarter 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 1.83 billion RMB, or $265.5 million, representing an increase of 123.5% from the fourth quarter of 2017, and an increase of 38.1% from the third quarter of 2018. Loss from operation in the fourth quarter of 2018 was 3.45 billion RMB, or $501.3 million, representing an increase of 106.4% from the fourth quarter of 2017, and an increase of 22.7% from the third quarter of 2018.
Excluding share-based compensation expenses, adjusted loss from operations, a non-GAAP measure, was 3.31 billion RMB, or $480.7 million in the fourth quarter, representing an increase of 102.4% from the fourth quarter of 2017, and an increase of 39% from the third quarter of 2018. Share-based compensation expenses in the fourth quarter of 2018 were 141.7 million RMB, or $20.6 million, representing an increase of 282.6% from the fourth quarter of 2017, and a decrease of 67.2% from the third quarter of 2018. The increase in share-based compensation expenses over the fourth quarter of 2017 was primarily attributed to increased options granted to employees in 2018.
The decrease in share-based compensation expenses over the third quarter of 2018 was primarily attributed to the higher cumulative share-based compensation expenses recognized in the third quarter, 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 3.5 billion RMB, or $509.5 million in the fourth quarter of 2018, representing an increase of 106.1% from the fourth quarter of 2017, and an increase of 24.6% from the third quarter of 2018. Excluding share-based compensation expenses, adjusted net loss, a non-GAAP measure, was 3.36 billion RMB, or $488.9 million in the fourth quarter of 2018, representing an increase of 102.1% from the fourth quarter of 2017, and an increase of 41.3% from the third quarter of 2018.
Net loss attributable to NIO's ordinary shareholders in the fourth quarter of 2018 was 3.52 billion RMB, or $511.5 million, representing an increase of 26.4% from the fourth quarter of 2017, and a decrease of 64% from the third quarter of 2018. Excluding share-based compensation expenses and accretion on redeemable non-controlling interest to redemption value, adjusted net loss attributable to NIO's ordinary shareholders in non-GAAP measures was 3.34 billion RMB, or $486.2 million for the fourth quarter. Basic and diluted net loss per ADS in the fourth quarter were both 3.37 RMB or $0.49 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 3.2 RMB or $0.47 per ADS in the first quarter.
Our balance of cash and cash equivalents, restricted cash and short-term investment was 8.35 billion RMB or $1.21 billion as of December 31st, 2018. Now, for our business outlook. For the first quarter of 2019, the company anticipates a sequential slowdown in vehicle deliveries compared to the fourth quarter 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 1st and the Chinese New Year holidays, as well as the current moderate macroeconomic conditions in China. For the first quarter of 2019, the company expects deliveries of the ES8 to be between 3,500 and 3,800 vehicles, representing a decrease of approximately 56.1% to 52.4% from the fourth quarter of 2018.
The total revenues to be between 1,390.9 million and 1,515.7 million RMB or between $202.3 million and $220.5 million, a decrease of approximately 59.5% to 55.9% from the fourth quarter 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&A session. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request at any time, please press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. If you have additional questions, you can re-enter the queue. Your first question today comes from the line of Dan Galves from Wolfe Research. Please go ahead.
Hey, guy. 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 the bigger 84 kilowatt hour battery help offset some of the reduction? 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.
Okay.
Hi, and thanks for question. I will speak in Chinese, and Ruoho will help me to translate.
Thank you.
Right now, we haven't received any official announcement from the government regarding the subsidy policies in 2019. 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. 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. We believe that this support in the taxation will continue.
另外的话，从目前来讲，执行的消费税对于电动车的优惠，我们相信也会持续一段时间。
We also believe that the advantages of the consumption tax on the electric vehicle will also continue.
所以综合来讲的话，未来的产品定位是在高端的一个市场。那我们相信补贴的下降对于未来来说的影响，相比一些入门级的车来讲的话是最小的，而税收的优惠对我们的帮助是最大的。这是我们看到，从一个总体的角度来讲，对我们有利的地方。
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. On the other hand, we do receive a lot of advantages with the taxations. In the long run, we will be in the advantageous position.
另外一点，对我们来说，在运营方面有一些积极意义的事情就是，以前因为有这样的一些补贴，所以消费者在购买我们的车的时候，消费者要预先扣掉这些补贴，我们要等国家的钱再给到我们。但是在实际的操作的角度来讲，要花很长的时间等到这些补贴到位，所以我们在这中间有很大的一个垫付现金的压力。如果补贴退坡了以后，更多的是用税收的方式来支持的话，对于我们现金流的压力，其实反而是更小的。
Another advantage of decreasing subsidy is that before, we have to deduct the subsidy for our users. We need to wait for the subsidy from the government. It takes a very long time to wait for the subsidy from the government. We need to pay some advancement payment. After the subsidy decreases, actually, since we receive more advantages with the taxations, actually, it will help us to release the pressure of the cash flow.
从长期来讲，我相信中国的这个政策，对电动车的政策更多地会聚焦在这个两方面，一个是使用环节的优惠，比如说北京的不限行，像上海的牌照的优惠，我们相信会有越来越多的城市会出台这样的政策。当然从这个角度来讲的话，我们认为这个其实对于电动车的普及的帮助会更大一些。那另外一方面，我们相信税收的优惠会持续比较长的时间。那么这两个因素，对于像蔚来这样定位在比较高端的这样的电动汽车的产品来讲的话，我们相信是能够帮助我们更多地去扩展市场空间，特别是从传统的汽油车的用户里面去发展更多的用户。
In the long run, I believe that the Chinese policies will be supporting the EV's development. I have these thoughts from two 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. I believe that more cities will be enacting this kind of EV-friendly policies in the future. Secondly, we do receive a lot of benefits with the taxes. 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 car users.
所以总结来讲的话，短期，特别是在Q2，我们相信会有一些压力，这个是一个事实。但在所有的电动汽车里面，我们相信我们的压力相对来说是小一些的。那从长期来讲，我们认为中国的这样一些政策的推动，我们相信还是能够帮助我们去更好地去拓展市场。
I'll sum up. In the short term, especially in the second quarter this year, we will be facing some pressures. The pressures on ourselves is much lesser than the pressure on other electric vehicle companies. 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 market.
Thank you, William. Dan, also, as far as your other question, Hainan Island has now enacted restrictive license plate restrictions. Sanya and Haikou are also joining that list. 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 an electric car future. Thank you. Next question. That's Okay.
Your next question comes from the line of Ryan Brinkman from J.P. Morgan. 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 not pursuing a wholly owned approach? 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 think I'll let William answer this. He's the most familiar with the plant situation. William, you wanna go?
Okay，thanks for the question。大家知道在去年11月份的时候，中国的工信部颁布了一个很重要的文件，50号的文件。那么这个文件第一次非常明确地说到，允许汽车研发企业，像NIO这样的公司和现有的制造企业去进行合作制造。也就是说，NIO和JAC这样合作的一个模式，在大方向上来讲，成为中国的主管的政府部门鼓励创新的一个模式。
As we all know, last November, the MIIT has enacted a very important file called number 50 file. In this file, it stated that the Chinese government endorsed the cooperation between the car R&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.
那当然这个细节的话，一些实施的细节还在制定的过程中，从目前的计划来讲的话，在今年的6月1号会正式地实施和接受这个批准，接受这方面的申请和批准。
Of course, a lot of the details regarding this document still need to be finalized. We expect that on the 1st of June, the details and this document will be finalized officially and it will be opening for the applications and approval procedures.
那这个对于NIO的好处来说，是将来的比如说补贴、碳排放积分，我们不需要通过JAC去申请再转给我们，我们直接可以申请。另外一方面的话，就是我们所有的产品，一个独立的汽车公司去进行产品的管理，对于我们来说当然是有长远的战略意义的。
The advantages for NIO is that first of all, we don't need to apply for the subsidies or the carbon emission credits via JAC, we can directly apply this from the government. Secondly, for NIO as independent car companies, we can manage our products very well, and this will be helping us with our long-term strategic planning.
所以这个从我们角度来讲的话，是非常正面的一件事情，也让我们能够重新地更好地去规划我们整个的制造方面的一个投资和管理的效率。所以从一个方向上来讲的话，我们更加坚决地会以制造合作的模式去进行我们以后的产品的生产。当然目前我们是JAC一家合作伙伴，长期我们也不排除会有别的合作伙伴。那这个从一个战略的角度来讲的话，坚持我们做制造合作的模式。
We receive a lot of benefits from this. With this, we can review and re-plan our investment in the manufacturing, and we can also improve the management efficiency of manufacturing. 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 an important part for our long-term strategy.
具体到JAC的合肥的我们的生产的基地，我们目前已经具备ES8加ES6，一共10万的年产能，目前我们已经具备这样的一个产能。经过去年的改造，去年下半年的改造，我们已经到了这个产能。然后我们近期和JAC也在进行更进一步的讨论，我们已经决定我们的第三款车型会在JAC进行生产。那么我们当然还需要做一些投资和改造，当然这一部分我们会承担其中的一部分。但总体上来说，我们和JAC还是有一个继续的合作。我们相信这个改造完了以后，会到15万的一个年产能，所以也就基本上满足我们两到三款车的生产能力，三款车的生产能力在未来的两到三年内。
Currently, because last year, during the second half of last year, we've modified our production lines for both ES8 and ES6 production. Now the annual capacity of NIO-JAC manufacturing site is about 100,000 units per year. Recently we've been having some discussions with JAC, and we decided that our third model will also be manufactured in this NIO-JAC manufacturing site. Of course, to be compatible with the third model, we need to make some investment and modifications in our production lines, and we will undertake part of this investment. In this regard, our cooperative mode with JAC will continue. 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 three models in the next two to three years.
那后续的生产制造的基地，我们还是会采用这种制造合作的模式，去找包括JAC在内的可能的制造的合作伙伴，去规划我们的产能。我想说的是，从我们规划到完成产能，以我们过去和JAC合作的经验，我们基本上用二十个月左右的时间就能完成全部的产能的实现。所以我们认为用制造合作这种方式，是能够更快速地去达到我们的产能的需求的。所以我们不觉得这会是公司发展的一个瓶颈，也能帮我们节省非常多的资本支出。
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. Based on our working experience and cooperative experience with JAC, it takes about 20 months from planning to ramping up to the ideal capacity. In the future, we will also uphold this so that we can meet our capacity demand. We don't think this will be a bottleneck for the company's development. Also it help us to reduce the capital expenses.
关于我们停止上海工厂建设，对我们在2019年度的资本支出的优化，我想Nick或者Louis，你们如果有什么数据可以share的话，可以说一下。
As for the optimization of the 2019 capital expenses because of this termination of the Shanghai plant, maybe Louis or Nick, you can share some figures.
I think based on this change of the strategy, I think definitely gonna be some short-term and mid-term saving on the CapEx spending for sure. Over 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 J.P. Morgan. Please go ahead.
Yeah. Hi, good morning. William and Nick and Louis, thank you for taking my question. Just one very simple question regarding the pricing strategy. Can we talk about our long-term pricing or medium-term pricing strategy considering two moving parts or two moving factors, one is subsidy cut, and the second is potential localization of Model 3 in first quarter. Thank you.
Okay. Thank you, Nick. William, do you want to talk about our pricing strategy?
那我们一直致力于采用一个更加合理的，不是简单的一个降价或者调低价格的一个方式，去扩大我们的市场。
We've been committed to adopting a more reasonable pricing strategy instead of just to reduce the price to take up the market share.
如果大家看到的话，我们ES8和ES6都提供电池租用服务。这个电池租用服务的话，车价事实上来讲是可以减掉10万块，然后用户每个月配一个电池租用的费用，就可以拥有我们的车。如果从我们的数字的角度来看的话，我们超过70%多的用户采用了电池租用模式。
For ES8 and ES6, we have battery leasing package or policy, which means that user can get a 100,000 RMB reduction if they choose this battery leasing service, and they only need to pay the monthly fee. From the number perspective, over 70% of our ES8 users have chosen this battery leasing service.
如果你去从这个角度去看的话，我们的ES6的用户，事实上初始付25万8，今年因为anyway还是有一些补贴，还会比这个更低的钱，并且还不需要交购置税。我们认为这个还是有非常大的优势。
In this regard, for ES6 users, they only need to pay about 258,000 RMB before subsidy, and they don't need to pay the purchasing tax. From the pricing perspective, our product can be very competitive in the market.
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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. I believe, or I think this price reduction can damage the brand image and the loyalty of their existing users and consumers. In the long run, 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 satisfaction and user loyalties, and then we can improve our sales and market share.
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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. 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. Nick, I think in my view, the Tesla price reductions, this is my opinion, I think is in part directly because our ES8 is outselling Tesla's top brands, the S and the X, which is why the price reduction was so significant. 15%-20% is huge. On Model 3, I think Model 3, the base version, which doesn't even compare close to our ES6 in performance or range, is over CNY 400,000. As William just said, ours is CNY 258, if you take the battery lease option to start with. I don't think it solves the competitive problem for Tesla in China.
Yes, thank you, William and Louis.
Thank you.
I was actually refrain, if we plan to lift MSRP, thank you for the answer. Thank you.
Ours is RMB 358. Theirs is about RMB 410, the cheapest version. The Model 3 is a small car. It's not even the same class, right? It's a small sedan. It's like comparing a 318i BMW. Ours is more like an X5, the ES6. Our range is 510 km. Their range is about 300 km. Our acceleration is a second faster than theirs. Zero to 60 in 4.7. Theirs is 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 Ha from Deutsche Bank. Please go ahead.
Hi. Thanks, management, for taking my questions. I have questions on two areas. Number one is on the longer-term kinds of sales outlook. We noticed that the company is giving a more conservative guidance for Q1 and Q2. Does it really change our longer-term expectation of around like 40,000 to 45,000 deliveries for the full year 2019? What would be the split between ES6 and ES8? A little bit follow-up on the sales outlook is that we recently saw a really positive documentary coming out from the "60 Minutes" of CBS, and I think that really helps to raise the awareness of the brand inside China. I wonder whether the company is trying to leverage on this publicity to help on the sales and help on the traffic in the NIO Houses. My second question is for the fundraising.
Congratulations on the successful convertible notes raising last month. My question on this one is that, can we have a rough idea of what is the cost for the options for the issuance? The second question is that, going forward, is this likely to be the major way of further fundraisings in future? Those are the two questions. Thank you.
Thank you, Vincent. This one, I'll take. It's a numbers question. The understanding is our forecast has not changed for 2019. 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. That uncertainty, and we said the macro. The other thing is, don't forget, in February, it's only half a month because Chinese New Year took up the first 10 days of holiday. We had some delivery delays in February due to the getting license plate registration offices open in China. The 811 is exceptionally low. We expect a pickup in March of this year. As I said, we have over 4,200 orders for ES8 that are in the bank, 5,000 and 45,000.
1,300 of them are for the six-seater version of the ES8. The six-seater version won't be available till Q2. The slowdown isn't as pronounced as it looks from the numbers. 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 was a little bit higher than we'd like. This coupon is 4.5%. It's a five-year CB with a three-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.
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. 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. You want to talk about fundraising more?
Yeah. Actually, there's two points I just want to add on top of what Louis just mentioned. Essentially, you are asking about the structure of the CB. In this transaction, I think there are two elements of the derivative financial structure in derivative nature. One is a cap called upper strike. That basically shows the management, the company's confidence over the long run, especially the high appreciation of stock price. In that element, that basically increased our strike price from 27.5% to 100%. The other element, as we call it, the zero 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. This is a typical practice in the market, in the CB market. Okay?
Thank you, Vincent. Does that answer your question, Vincent? Basically our forecast remains unchanged. There may be slightly more ES6 orders, since we're already at 7,300, three or four months before launch. We think that's a very strong number. Then ES8, I think Q2 should be better than Q1. I think ES8 is already the number one selling premium EV and seven-seater EV in the market already. It's already outselling the Model X by a wide margin. It's basically already the market leading position. Next question.
The 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 third model? 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. [Non-English content]
ES8 is our first product, and from a manufacturing to delivery, in terms of the readiness of supply chain quality and the software, we need to improve a lot. For the past six months, we've experienced a lot of challenges. Some days we need to manufacture at least 100 or 200 cars, and we need to deliver that many cars every day. This is a huge pressure for us. I get to say we have overcome that period of time, and I will appreciate our team for this great contribution.
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As of today, we've delivered cars to 270 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 face some pressures with our service.
I cannot say this is a lesson learned. For the last quarter, for the first quarter 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. Because we didn't want to keep our users waiting for such a long time, we have some intensive user deliveries. For what we get from the past quarter, we think we can further improve our efficiencies with the service and the service operations. I believe this will be a long-term target and this will help us to further improve our user satisfaction.
所以从今年开始，我们认为NIO开始进入到我们的第二个阶段，我们自己内部把它叫做一个资格赛的阶段，我们认为最重要的事情，第一个在保持高的用户满意度的情况下，我们如何提高我们总体的运营效率，这是在这个阶段非常重要的一个工作的重点。
Starting from this year, we believe that NIO has entered into the second phase of a competition. We call it the qualifying round. 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, Fei, I think in my view, ES6 will obviously have some cannibalization effect on ES8, I think that's normal. They're both SUVs. One's five-seater, one's seven-seater. I want to remind you that the five-seater version, five-seater SUV market, is many times bigger than the seven-seater SUV market, which is very limited in China. I think the potential for ES6 is much larger in orders and is reflected in our half-year forecast than ES8. I think it's inevitable.
我补充一下Louis说的是非常重要一点，就是因为ES6是一个五座的高端的SUV的市场，是十倍于七座的SUV的这样的一个市场。所以ES6所在的一个市场，就是30万人民币以上的五座的SUV的市场，是一个接近100万辆的这么一个市场。那像ES8所在的这个40万以上的这个七座的SUV的市场，大概是不到10万辆的一个市场。所以我们更看重自己在整个的这个市场里边的份额。那从ES6的角度来讲，我们整个的这个目标还是需要让更多的人来体验这个ES6，所以我们今年非常重要的一个工作就是让更多的人来试驾ES8和ES6，在这方面我们有非常积极的计划。所有试驾过的、接触过NIO的用户，应该说对我们都有非常正面的评价，我们是非常有信心，我们的产品是非常适合中国用户的需求的。那当然现在还有很多人不太了解NIO。我希望大家看一件事情，就是我们已经买了NIO的这个用户，已经买了我们车的用户，对我们的满意度是非常高的。如果你去看一些所谓自媒体的评价，你的印象也许他们有的一些比较哗众取宠的标题，有的时候可能觉得未来这个车的竞争力，整个产品和服务的竞争力，感觉能看到一些负面的东西。但如果你去看我们真正的用户，那你会得到完全不同的评价。我们的用户对我们的评价的满意度是非常高的，所以我相信这是未来参与长期竞争的一个基础。
Louis has mentioned a very important information. The market size of the premium five-seater SUV is 10 times bigger than that of the premium seven-seater SUV, which means that the total volume of the five-seater SUV above the price of CNY 300,000 is over 1 million units. That of seven-seater SUV is only about 100,000 units. We care a lot about our overall market share instead of just for ES8 or ES6. 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 of test drives around China so that more users or more potential users can have a try.
For our existing users who've 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. Actually, NIO has one of the highest user satisfactions, and we also want to keep improving this user satisfaction. 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. If you look at the real user feedback, you will find that the feedback from our users are quite positive. 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.
Yeah, sure. Thanks for taking my question. My first question is regarding your strategy after this subsidies decline. Say, how much % you could pass this shortfall to your customers, or you plan to pass. If the subsidy declines by CNY 100, how many CNY 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 in the subsidy, or you want me to do it?
Yeah. Sorry, confirm the question.
Thank you, William.
There are two types of sub-
Go ahead, sorry. I'm sorry.
Doing the translation. Sorry. There are two types of subsidy. One is national subsidy, one is local subsidy. Actually, it is not very easy for some users in some cities to get local subsidy already. As for the subsidy decline or reduction, if the subsidy declined by CNY 1, actually user need to pay for that CNY 1. There is no plan to adjust our price because of this subsidy reduction, which means that if the national subsidy decreases by CNY 10,000 this year, users need to pay CNY 10,000 more. Before we receive the official announcement of the subsidy policy this year, actually, even if the subsidy policy of this year is released, there's no plan to reduce our price to cover the shortfall.
To add to that, I think our prices are ready, for the price and value of performance, are already the best in the market with ES6 and ES8. 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. I think there's no reason for us to take down our price. The subsidy will keep our margins in place. Also with the 3% reduction in VAT tax, that should help our gross margin significantly. I think the government policies are actually quite positive for us.
Okay.
Thank you, Paul.
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. NIO ES8 orders were about 10,000 at this time. Don't forget, ES6, we haven't started the marketing campaign yet. This is mostly the referrals of word of mouth. 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.
Now we have NIO Houses in 27 cities. There'll be a cost in Q1 to absorb the cost of building a lot of ES6s, allow test drives. 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 of the lighter, sportier version of the ES8, it drives phenomenally. We believe that once we start allowing test drives, the order number will go up quite fast in the May, June timeframe.
它肯定不是像ES8那样，一上来就会有那么高的预订单。所以这个是在我们预期中的事情。所以这就是为什么Louis强调我们会在五月份开始做大规模的试驾这样的一些活动。所以我们相信它是一个更大的市场，也是一个竞争更激烈的市场。但是相对来说，我们的竞争优势其实仍然是非常巨大的，和传统的汽油车相比的话。
ES6 and ES8 focus on different market and user groups. For ES8, it taps into the premium seven-seater SUV segment. In that segment, we don't have many competitors. Also, ES8 represents the first official debut and the product launch of NIO, and a lot of users who were not potential seven-seater SUV users bought our cars because they love the NIO brand. That's why we receive more orders than ES6 at the early stage of ES8 product launch. For ES6, the market situation is different. It taps into a bigger market. At the same time, the competition is more fierce. For example, we have Q5, GLC, X3 in this market segment. Their sales volume every month is over 10,000 units. We are also very confident with our ES6 performance, user experience, the advantages with the taxes, and the innovative services.
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-scaled test drive campaign and market campaign starting from May. 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.
The next question comes from the line of Bin Wang from Credit Suisse. Please go ahead.
Thank you. Number one is about the NIO House number. I also heard that right now it's 27. It has been going about 70 by the end of this year. I want to know whether you have any change about the plan for the NIO House number. That's number one question. Number two is about Tesla, actually, NIO will have localized the Model Y next year. Can I assume the ES6 competes Model Y? Model Y has been said at 10% bigger than the Model 3, since then it will compete with the Model Y. I want to know whether it competes Model Y. Model 3 have such a big success in the U.S., do we have any plan to introduce similar models than the Model 3 from NIO in the future, say, 2021?
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. You have been guiding the software may be ready in May this year. Can we have update about the software when will be fully ready to have a much better user experience? Lastly, I also have a question about the battery. ES6 have a better battery, and can we know when the battery can be used, I mean, the same 811 battery can be used for ES8? When will be used, if at use, will the price of the ES8 will be increased or not? Thank you.
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 launch ES6, and because of the dispersion of the ES8 orders across the cities, you won't see us go to 70 cities this year. We realize that the expenses are high, we are controlling the expenses. 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. That's number one. We think we have pretty good coverage in the 27 cities. We may add a few more, it won't be a large-scale expansion into 70 cities this year. Second, 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. If the Model 3 is, 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 two. That will still not be as price competitive with our ES6, which is RMB 358,000. That depends on whether you get one motor or two motors in the Model Y. I think as our ES6 will compete very well, it should be a slightly bigger, it'll be an X5 versus an X3, which is what I think the Model Y will be comparable to.
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, we haven't decided on what the format of that will be. We don't know if we will, there's no immediate plans in the next year to have a car that will compete with Model 3 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. Second is the model, the ES6 is cheaper than the Model 3 and much higher price performance statistics. Faster, longer range, much more luxurious.
Remember, the Model 3 is a slimmed down, nothing fancy in the interior, with not the same service level as ES6. I think they're different classes, and I think the ES6 should be a much more appealing car to Chinese users. Your question on ADAS software. The current timing is for Highway Pilot or NIO Highway Pilot to be available sometime in Q2. Don't forget, the NIO ES8s are already equipped with the ADAS hardware. For us, once that's available, then once we will order that package, we will get a high revenue, a high gross margin number. We'll turn it on the software side, it will make over RMB 35,000-RMB 40,000 by doing that. 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. ES6, for a cheaper version, can use the 70 kilowatt battery as well. 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 an 84 kilowatt battery if you want to buy that. We are offering it available. It's the same battery pack. It's swappable. For the 70 kilowatt batteries that are from ES8 that are changed, we will use them in our swap network. They won't go to waste. 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.
That will solve the range issues for that. The biggest complaint from ES8 owners was range. 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. 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.
Thank you, everyone
On future calls.
Thank you.
Thank you.
Thank you.
This concludes this conference call. You may now disconnect your line. Thank you.