XPENG Second Quarter 2023 Earnings Conference Call - Earnings Call Transcript - Full

 

Operator: Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2023 Earnings Conference call for XPeng Inc. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

 

I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations for the company. Please go ahead, Alex.

 

Alex Xie: Thank you. Hello, everyone, and welcome to XPeng’s second quarter 2023 earnings conference call. Our financial and operating results were issued by our Newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com.

 

Participants on today’s call from our management will include Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investments, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; and myself.

 

Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note 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 involve inherent risks and uncertainties. As such, company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed 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 XPeng’s earnings press release and this conference call include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. XPeng’s earnings press release contains a reconciliation of unaudited non-GAAP measures to the unaudited GAAP measures.

 

I would now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

 

He Xiaopeng: Hi, everyone. During the first half of this year given the intensified competition and rapidly evolving environment, I led a set of reforms across business strategy, organizational structure, product and marketing to tackle huge risks and challenges and forge significant comprehensive transformation within a short timeframe. Today, I’m pleased to report that these transformational adjustments have generated better than expected results internally and externally and propelled XPeng into the initial phase of a virtuous cycle. The G6 has become the dominant BEV model in the RMB200,000 to RMB300,000 price market segment, turbocharging our sales growth momentum.

 

We’ve created meaningful breakthroughs in commercializing our industry-leading, full-stack, self-developed EV platform and intelligent technologies. We have formed a long-term strategic partnership with Volkswagen. As part of our partnership, we’ll embark on broad based collaborations to develop EV platforms and intelligent software technology, creating long-term value for both companies. Moreover, an inflection point in user acceptance for ADAS is emerging faster and stronger than we expected.

 

We saw orders for the G6 Max version accounted for 70% of total G6 orders in the first month of its official launch, far exceeding our estimate.

 

Our NPS and OTA satisfaction scores improved continuously in the first half of the year, reaching an industry-leading level as we prioritize customer-centric transformation. In addition, the changes at XPeng have boost the team morale, owner engagement and the confidence of suppliers and other external partners. This provides a strong foundation for advancing organizational adjustments, cost saving initiatives, efficiency improvement and new product launches.

 

This month marks the ninth anniversary of our inception. Over the past nine years, we have been steadfastly committed to advancing technological innovation. That commitment has never wavered. We plan to advance full-stack technology innovation in core areas to make leading-edge smart EV products accessible to a broader range of customer cohorts across the globe. As we grow to a larger scale, we’ll build a sustainable business model, underpinned by full stack capabilities across hardware, software, commercial operations and partnerships for empowerment.

 

As we move forward with this recent transformation, I continuously remind myself and the team that in order to succeed in this growing competition, in the long run, we must consistently look beyond short-term financial performance as we tirelessly evolve and advance our underlying capabilities. That said, I am glad that our efforts to elevate our underlying capabilities across the board have begun to bear fruit.

 

Our vehicle deliveries have grown, sequentially, for six months straight and continue to grow. Specifically, the P7i, our new product launched in March 2023, has been gaining great consumer traction, with its monthly deliveries surpassing 3,000 units for two consecutive months since June, overcoming supply chain challenges. As we enter the second half of this year, we believe we’ll further ramp up the capacity and product competitiveness of the P7i model lineup to drive its continued sales momentum.

 

More importantly, our first strategic model built on SEPA2.0, the G6, made its market debut at the end of June and has quickly become a phenomenal bestseller in the segment. Guided by our SEPA2.0-enabled platform-based cost efficiency and a pricing strategy that prioritizes scale expansion, XPeng G6 has emerged as the industry pioneer in introducing the most advanced technologies such as 800-volt SiC platform and full-scenario ADAS, which is accessible to mainstream consumers of RMB200,000 to RMB300,000 price market segment. Furthermore, the G6 has become more popular across a wide range of consumers, including those in both higher and lower price segments.

 

Today, I want to extend my deep gratitude to those owners who are patiently awaiting delivery of their XPeng G6. We’re making every endeavor with our supplier partners to ramp up our production output for the G6, especially for the Max version. We currently estimate that G6 delivery volume in September will grow significantly, fueling our monthly deliveries to reach over 15,000 units in total.

 

In the upcoming fourth quarter, we’ll continue to accelerate G6 production throughput to capture the increasing market popularity that has followed its first batch of deliveries, with a goal to deliver more than 10,000 G6 monthly.

 

With G6 ramp-up and enriched configurations for other on sale models, we’ll strive for a peak monthly delivery of 20,000 in the fourth quarter. I believe the success of the G6 is just the beginning. Moving forward, we plan to introduce an even wider range of SEPA2.0-enabled top-selling models.

 

In July, we announced our long-term strategic partnership with the Volkswagen Group. I believe that forming this partnership marks a milestone not only in XPeng’s business journey, but also in China’s auto-making development. XPeng and the Volkswagen Group are highly compatible in our underlying technological beliefs and long-term vision for the evolution of smart EVs and we each hold compelling and complementary industry advantages.

 

Combining XPeng’s industry-leading smart EV technologies with Volkswagen’s world-class design, engineering and supply chain capabilities, our collaboration will begin with two B-class BEV models to bring best-in-class technologies, top-notch products and a superior experience to our customers. Volkswagen Group will also make a long-term strategic equity investment in XPeng for a total consideration of approximately US$700 million.

 

We’ll continually deepen our cooperation with the Volkswagen Group and build stronger synergies in the next-generation EV platforms, software technologies and supply chain capabilities, sharing economies of scale. I’m excited about this strategic partnership, which underscores Volkswagen’s confidence in and recognition of our in-house, self-developed core technologies and groundbreaking capabilities.

 

Our cooperation creates the globe auto industry’s first collaborative business model that integrates software and hardware full-stack technology and we’re moving to capitalize on this opportunity to generate immense value for our shareholders.

 

As technology trends continue to evolve, I’m convinced that globally, the era of software-defined cars will conclude and will venture into a new era of AI-powered vehicles. XPeng will be among the most active advocates of this evolution, where we expect to reap substantial benefits.

 

As we progress, I will establish an enterprise-level team taking charge of autonomous technology R&D, roadmap planning and operations. I’ll personally lead this macro intelligent tech team, unifying the development planning for ADAS, smart cabin, electrical and electronic architecture functions, as well as the evolution of several innovative initiatives.

 

We’re ready for AI to disrupt the existing automotive technology system as human-machine copilot and AI power autonomous driving gathers steam and reshape our driving habits. I look forward to presenting our latest achievement and R&D roadmap in intelligent technologies at our 2023 Tech Day on October 24th.

 

Over the second half of this year, we plan to make additional major breakthroughs in experience and coverage with our XNGP ADAS to further drive customer acceptance and the adoption process, widening the technology gap with our peers. The development of our XNGP that does not rely on high-precision maps is speeding up and we just completed a number of professional media test drives with XNGP prototype versions across many districts in Beijing this week. A media who participated gave overwhelmingly positive reviews on the XNGP-assisted driving because it did not rely on high-definition maps or prior knowledge of the roads. For our next OTA software update slated for October, we will roll out the XNGP, independent of HD maps, in the first batch of cities, along with other new features that we have yet to announce, but are sure to delight XNGP to delight XPeng owners.

 

We’re confident that we’ll make non-HD-map-reliant XNGP available to customers across approximately 50 cities by the end of this year. Through technology innovations, our work will also entail cutting XNGP’s BOM costs by about 50% by 2024, ensuring our models have the most advanced autonomous driving hardware as standard configuration. We’re simultaneously exploring flexible pricing models for our software subscription business.

 

I am closely working with our President, Ms.Wang Fengying, to achieve the highest cost control level among carmakers in the world and China and prioritize cost savings as one of the core goals for various business units, including product design, R&D, manufacturing, supply chain, and marketing. With several cost-saving initiatives going well, I have great confidence in achieving the goal of reducing overall costs by 25% by the end of 2024, with even better results in some other subdivisions.

 

These cost-saving initiatives will strengthen our product competitiveness and substantially drive gross margin improvement in 2024. Interestingly, two years ago, I expressed my view that considering cost-effectiveness, no auto company could offer competitive autonomous cars to consumers at RMB150,000 level.

 

But as we implement technology innovation and full cycle cost reduction, I have changed my mind and formulated a clear plan to make autonomous cars affordable for the largest market segment in China, the RMB150,000 price range. This will greatly promote the accessibility of intelligent autonomous driving. In terms of sales, marketing, and service capabilities, under the leadership of our president, Wang Fengying, we have continuously improved customer satisfaction and cross-team collaboration. Looking ahead into the second half of the year, we’ll accelerate our business model transformation across our domestic and international sales channels.

 

To that end, our efforts will include optimizing our sales network drastically and partnering with more top dealers. These initiatives will spur our expansion and help us gain market share across Tier 2 and lower-tier cities.

 

Regarding cash flow, our cash on hand at the end of the second quarter of 2023 amounted to RMB33.7 billion. With vehicle deliveries back on track for sequential quarter growth, we significantly narrowed our cash outflow from operations to around RMB1 billion.

 

Over the second half of 2023 with accelerating sales growth from the G6 and other new products, we expect our gross margin to rebound gradually and will continue to improve our operating efficiency. As a result, we expect our overall cash flow from operations to turn positive for the second half of the year.

 

Now, moving to our guidance. We expect our total vehicle deliveries to be between 39,000 and 41,000 units in the third quarter of 2023, representing 68.1% to 76.7% quarter-over-quarter growth and revenue to be between RMB8.5 billion and RMB9 billion. Thanks to the proactive adjustment we made over the last several quarters, moving into the third quarter this year, we have seen our sales, branding, team morale and cash flow started to form a positive loop at XPeng.

 

As the power of AI reshapes the auto-making industry, we expect our virtuous cycle to accelerate and cover more areas over the next two years.

 

Thank you, everyone. With that, I’ll now turn the call over to our new VP of Finance, Mr. James Wu, to discuss our financial performance for the second quarter of 2023. By way of introduction, before joining XPeng, James held executive finance roles at both, General Motors, US and China headquarters and at SAIC-General Motors-Wuling Auto. We look forward to tapping into his extensive experience in finance and operations management and his valuable insight into international business practices. James’ skill set is ideally suited to lead our finance and operations team and we look forward to his contributions as we embark on our next level of success.

 

James Wu: Thank you, Xiaopeng, and hello everyone. Before I start, I’d like to say that I’m really happy to join Xiaopeng in this exciting time and look forward to our future interactions. Now, I would like to provide a brief overview of our financial results for the second quarter of 2023.

 

I’ll reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB5.06 billion for the second quarter of 2023, a decrease of 31.9% year-over-year and an increase of 25.5% quarter-over-quarter.

 

Revenues from vehicle sales were RMB4.42 billion for the second quarter of 2023, representing a decrease of 36.2% from the same period of 2022, and an increase of 25.9% from the first quarter of 2023. The year-over-year decrease was mainly attributable to lower vehicle deliveries and discontinuation of new energy vehicle subsidy, while the quarter-over-quarter increase was mainly due to higher vehicle deliveries of the P7i.

 

Gross margin was negative 3.9% for the second quarter of 2023, compared with 10.9% for the same period of 2022 and 1.7% for the first quarter of 2023. Vehicle margin was negative 8.6% for the second quarter of 2023, compared with 9.1% for the same period of 2022 and negative 2.5% for the first quarter of 2023.

 

The year-over-year and quarter-over-quarter decreases were explained by, first, the inventory write-downs and losses on inventory purchase commitments amounting to RMB0.2 billion related to the model G3i as management lowered its forecasted sales due to stronger than expected market demands for newly launched vehicle models, with a negative impact of 4.5 percentage points on vehicle margin. Secondly, increased sales promotions and the expiry of new energy vehicle subsidies mentioned above.

 

R&D expenses were RMB1.37 billion for the second quarter of 2023, representing an increase of 8.1% year-over-year and an increase of 5.5% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as we expand our product portfolio to support future growth.

 

SG&A expenses were RMB1.54 billion for the second quarter of 2023, representing a decrease of 7.3% year-over-year, an increase of 11.3% quarter-over-quarter. The year-over-year decrease was primarily attributable to the reduction of commissions paid to franchise stores and lower marketing and advertising expenses. The quarter-over-quarter increase was mainly resulting from higher marketing and advertising expenses to support new product launches.

 

As a result of the foregoing, loss from operations was RMB3.09 billion for the second quarter of 2023, compared with RMB2.09 billion for the same period of 2022 and RMB2.59 billion for the first quarter of 2023.

 

Net loss was RMB2.8 billion for the second quarter of 2023, compared with RMB2.7 billion for the same period of 2022 and RMB2.34 billion for the first quarter of 2023. As of June 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB33.74 billion.

 

To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our second quarter financial results. This concludes our prepared remarks. We’ll now open the call to questions.

 

Operator, please go ahead.

 

Q&A

 

Operator: Yes. Thank you. The first question comes from Tim Hsiao with Morgan Stanley.

 

Tim Hsiao: So, my first question is about the improvement of the component supply, because XPeng’s third quarter volume guidance suggests continuous improvement of the component supply. However, the longer waiting time has adversely affected the new order momentum of G6 lately. So, just want to know that when do we expect that bottleneck would be fully removed and how could we reboost the order momentum of G6. And do we expect the 10,000 per month is more like the steady or stable monthly run rate and will XPeng consider to add or replace with new supplier for the upcoming model to avoid such bottleneck from [indecipherable]? Thank you.

 

He Xiaopeng: Thank you for your question. First of all, we are very confident of G6 future sales and it’s definitely going to be very competitive. And right now, looking at G6, among the RMB200,000 to RMB300,000 price range, definitely, it is one of the top players and definitely we expect orders to continue to go up.

 

However, right now, the biggest challenge that we face is the Max version, because we are lacking in the supply of some of the core intelligent part. But we are seeing the ramp-up of the supply of the parts since August. And going into September and October, we expect the same ramp-up momentum to continue as well. So, definitely, going into Q4, we expect to achieve at least 10,000 monthly deliveries for G6.

 

And right now, we have done actually a lot of adjustment and revolutions to avoid such shortage issues in the future. For example, with the launch of our SEPA2.0 platform, not only can we reduce the overall production costs of our future models, but we can also reduce the reliance and dependence of our supply chain as well. So, in the future, our supply chain will be much easier to manage and it will be much more straightforward as well. And in the future, we will have much more models that are built on SEPA2.0, which means that we can have better management and control over the supply of our core parts.

 

And because of the SEPA2.0, we also can actually have a lot of the parts that are mutually compatible on the platform that can support the development of a lot of our future models. So overall speaking, given what we observed from G6 so far and thanks to the development of our technology, we believe that our supply chain constraint is getting resolved. Thank you.

 

Tim Hsiao: So, my second question is about the pricing competition. So, just want to learn more about the management’s view on the potential impact from the new wave of the price war along with the competitors like Tesla’s upcoming new model launches in September. Does XPeng need to get more aggressive with its pricing or promotion strategies for current G6 or upcoming models? If so, how should we think about the impact of vehicle margin in third quarter and thereafter? Could we effectively pass through the cost pressure to our supply chain? So, that’s my second question. Thank you.

 

Brian Gu: Hey, Tim. It’s Brian. Let me address your question. First of all, the recent price movements of our competitors have not really impacted our sales, especially the growth trend of G6, because when we actually established our pricing for G6, we anticipated competitive pressure.

 

And I think, the resulting momentum, I think, is actually intact. But before I address the pricing, as well as gross margin trends I want to underscore that our strategy right now is to make sure that we regain growth and scale. I think that’s the foremost strategic priority for us this year. As you can see that we have actually successfully gained the growth momentum. We actually now are forecasting returning to our historical high in terms of quarterly revenue rates that actually will help us in the long run to gain scale economy as well efficiency.

 

Another priority that we actually also, as a company, we want to achieve for the second half of this year is to gain very strong cash flow. As you heard earlier that we actually anticipate, with the growth of our deliveries, our cash flow for the second half on the operational level will be positive. So, I think that’s also important for us to build our momentum into improving economy.

 

So, on the gross margin trend, I’ll hand over to James to give you some sort of a trend sort of estimate, but I think that’s something that, clearly, we cannot give guidance at the moment, but I think can give you some trends to analyze.

 

James Wu: Yeah. So, I just wanted to add, as Brian mentioned, our focus is very clear in terms of gaining volume and scale, which obviously will help improve our gross margin as well as we’ve seen our manufacturing cost. As mentioned in the earlier script, we’ve got some EOP impact from the G3i in Q2. I just want to note that, we still have some level of production scheduled for G3i in the third quarter, so there will be another portion coming through in the third quarter.

 

And as we increase volume in Q3 and into Q4, we expect our gross margin to improve over time. And as we sell a better mix of products in the second half, we do expect our gross margin to become positive in the fourth quarter of this year.

 

And lastly, I just want to echo that, as Brian mentioned, from a cash flow standpoint, as we increase volume in the second half, we’ve already seen some pretty big improvement in the second quarter in terms of cash flow. And into the second half, we are pretty confident that we will be achieving positive operating cash flow and have a really a healthy cash balance toward the end of the year. Thank you.

 

Tim Hsiao: Thank you very much, Brian and James, for the details shared. Thank you.

 

Operator: Thank you. And the next question comes from Tina Hou with Goldman Sachs.

 

Tina Hou: Thanks, management, for taking my questions. The first one is in terms of the distribution network building. As management mentioned, there will be a lot of changes and optimization as well as deepening into the lower tier cities into the second half of this year as well as next year. So, should we expect a higher level of sales and marketing expenses accordingly in the second half of this year as well as 2024? Thank you.

 

Brian Gu: Hey, Tina. This is Brian. I think you’re right. We’re actually making changes to our sales channel and strategy. We actually are envisioning more partners to be our store investors and sales agents. And that effect, I think, will lead to a better penetration of lower tier cities as well as, I think, optimize the sales performance because we actually simultaneously will weed out weaker performers on the sort of stores, both in terms of [owned], as well as our current channels.

 

Interestingly, this actually, we envision will lead to a more efficiency gain and lower sales marketing cost for our operations, because we think, right now, the optimal efficiency has not been achieved with our current model and also we actually have not partnered with enough high-quality and efficient operators. So, with renewed focus on partnership and also higher standard setting for our sales partners, I think will lead to higher efficiency. Thus, actually, we envision more efficient and lower sales marketing ratios.

 

Tina Hou: So, my second question is regarding the operating level breakeven point. Since management mentioned that the gross margin will start turning positive into Q4 this year, just wondering because we’re still continuing to invest in R&D continuously, so what would be the expected operating profit breakeven point? Thanks.

 

James Wu: Yeah. Thanks, Tina. I think for guidance on overall company breakeven as well as more cash flow forecast, we’re actually maintaining our current view that by 2024, we will achieve quarterly free cash flow positive. So, that’s something we’re confident next year we can actually hit. And then for the overall breakeven year, we still maintain sometime in 2025, we’ll achieve breakeven for the whole company.

 

Operator: Thank you. And the next question comes from Paul Gong with UBS.

 

Paul Gong: So, my first question is regarding the autonomous driving without the HD map. I can understand it could offer more coverage of the applications in terms of cities. How does the cost compare with the previous version with the HD map? And to achieve that, what are the key challenges we have to overcome?

 

He Xiaopeng: Thank you for your question. This is slightly technical. I’ll try to provide a simple and straightforward answer. When we are equipped with our high-definition maps, it’s very easy for XNGP to be guided because you will know when to expect to change lanes before turning left or right.

 

However, without the high-definition maps, things will get much trickier because the XNGP system will have to judge on its own where to change or what kind of situations will change beforehand. For example, it will need to be equipped with the hardware sufficient for it to actually identify dotted lines on the road or solid lines on the road or signs and characters that says that this is a left turn corner or right turn signals. This is just like when a person visit a new environment, he will need some time to get acquainted and there is always possibility for mistakes. However, there are a lot of pros that come from this non-HD-map-reliant XNGP. First of all, you don’t need high-definition maps, which means that you can go wherever you want as long as you have, for example, the conditions and the hardware equipped that comes with XNGP. And basically, theoretically speaking, as long as your phone can guide you there, our XNGP, without the HD maps reliance, can also guide you there.

 

And the second benefit is that you don’t need to jump through hoops to get policy approval because of its high safety. And the third benefit is that you don’t have to spend extra bucks to purchase the high-definition maps. And also, another big benefit is that you actually lower a lot of the maintenance costs, because it is by default of the XNGP to actually recognize any sort of road conditions. For example, there might always be construction going on on the road that might not be indicated in high-definition maps and you need to be able to adapt to that kind of changes.

 

Now, obviously, what you mentioned in your question are the major challenges. Basically, it comes down to the capability to actually identify the environmental elements, including words and characters, signs and signals, pictures and basically all of the traffic items, all of the vehicles and other kinds of road participants that are surrounding you and you have to actually make decisions based on that ahead of time. And basically, that is my simple answer. I hope that helps. Thank you.

 

Paul Gong: So, my following second question is still regarding the HD, regarding the autonomous driving, in this case, without HD map. Does it mean it leads to observe more environments and calculate more, think more so that it requires even more calculation power on the chips? And regarding the cost down of autonomous driving hardware heading toward 2024, you mentioned you are going to cut your costs by 50%. Does that mean you are going to use a smarter software to reduce the requirement of the calculation power or shall we maintain the calculation power, even bigger calculation power?

 

He Xiaopeng: Okay. Thank you for your question. Definitely, when we need to adopt multimodal perception fusion and use higher-level algorithms, definitely, it will require more computing power. However, we were already very successful with our CNGP, even using 30 TOPS computing power. And nowadays, we actually have 512 TOPS computing power. So, definitely, we believe that we are very sufficient. And actually you can expect to hear more about our ways to reduce costs while building up our intelligent driving power on our Tech Day this year on October 24th. And one of the key things I’m going to talk about is how we can drive down our production cost using technological innovation and management innovation as well on an operational level.

 

For example, in terms of computing power, we are actually, right now, thinking about how to utilize the electronic and also electric architecture to improve our efficiency by using maybe, one, PCBA; and also two, SoC to do everything together. This is just an example, and you can expect to actually hear more on our Tech Day. Thank you.

 

Paul Gong: Thank you very much. Quite helpful. Thank you.

 

Operator: Thank you. The next question comes from Bin Wang with Credit Suisse.

 

Bin Wang: Okay. My one question is about 2024 new products. You just mentioned that you will be producing one self-driving car in the pricing range around RMB150,000. Is it going to be a product slightly lower than the G6, for example Thank you.

 

Brian Gu: Hey, Bin. This is Brian. We have planned for two new model launch next year, but specific, sorry, we’ll not be providing this at this moment obviously. But we envision those all will be large volume drivers for growth as well. Likely to be launched in the second half.

 

Bin Wang: Thank you.

 

Operator: Thank you. And the next question comes from Xinchi Yin with CITIC Securities.

 

Xinchi Yin: So, my number one question is about our guidance on the product pipeline on the second half. So, when will be the exact release date of the MPV X9? And could you provide more information on the MPV in details, for example, the price, the size, the cruising ranges, etcetera?

 

And my number two question is about the strategic collaboration. So, apart from Volkswagen, is -- or will there be any other OEMs that are looking forward to have collaborations with Xiaopeng and what is our attitude for the potential collaboration opportunities in the future? Thank you.

 

He Xiaopeng: Let me take the first question. First of all, the development of our upcoming seven-seater has been going really well. So, we expect to follow our original plan, which is to debut the car in late Q4. We don’t expect to deliver it in a mass scale by the end of the year. But starting from next year, we expect to have mass deliveries and we definitely will prepare the supply chain well enough for this car, learning from previous experience.

 

In regards to the details about the car, unfortunately, I’m not able to give you too much information. However, several things I can talk about here. First of all, it’s supported by the SEPA2.0 platform, which means that in terms of its intelligence and also the whole car integration, it is of the same logic as G6.

 

And the second benefit of this car or selling point is its spaciousness. It is huge, especially its inner space. I would say that we expect it to be the biggest in terms of its inner space of the same vehicles and models of the same price point. And another big advantage to it is its handling and drivability. It offers top-notch driving experience. That’s all I can say for now. Thank you.

 

Charles Zhang: Hi, Xinchi. It’s Charles here. I’ll address your second question. So, first of all, our strategic partnership with Volkswagen Group is a long-term and a win-win partnership, and we see we have highly complementary strength to bring into this partnership.

 

And our collaboration on the G9 is only a start, and we see there are other opportunities that we can collaborate in the future and we believe that as such we actually created the first-of-its-kind like a collaboration business model on the full-stack platform and the software technologies. So, I think that in terms of the collaboration with potentially with other parties, I think that we remain open-minded, but also in the meantime, we will be very selective. We will look into the strategic value and also commercial value that can bring to us and also bring to our partners.

 

Operator: Thank you. And the next question comes from Yuqian Ding with HSBC.

 

Yuqian Ding: The first question is to ask when the management would think would be the iPhone 4 moment for the autonomous driving. It looks like the big data would exhausted the corner case eventually, but to truly achieve hands-off and eyes-off and minds-off, does that requires regulatory support, or the technology just naturally matures to no engagement per millions of miles?

 

He Xiaopeng: Thank you for that question. It’s a bit tricky. I’ll try to answer it to the best of my capability. My short answer is that 2025 or 2026 will be the iPhone 4 moment for autonomous driving.

 

Now, there are several influencing factors to it. The first one is the full area coverage. When I mentioned full area, I’m actually referring to covering 95% of China roads, including not just highways, but also urban areas and also within the different neighborhoods and also parking garage, etcetera. And the second factor is the cost of manufacturing and also producing such high level of intelligence. And the third factor is its overall capability, and that is actually twofold. The first one is the safety profile and the other is the overall driving experience. As you mentioned, a takeover rate definitely matters, so we expect to actually have, for example in the coming two to three years, which are level of having zero to one or one takeovers within 1,000 kilometers and maybe on the highway. We have already achieved that, which is to have one takeover per 10,000 kilometers. Another big part to it is the driving experience is actually whether or not it can actually beat a human driver in terms of its smartness and also its driving efficiency.

 

Now, personally speaking, I expect to reach that point of iPhone 4 moment in 2025, because, thanks to the rapid development of LLM, we believe that it’s actually bringing up the schedule. Otherwise, it could be 2026. Thank you.

 

Yuqian Ding: My second question is about the new product cycle. Although we understand that could be limited that can be shared on the detail side, but the comment did talk about the pricing spectrum to be arching between RMB150,000 to RMB350,000. So, we see the midsize, the G6, targeting RMB200,000, RMB250,000, and the compact size may be covering the below. So, do we consider like to revise or refresh G9 model for the potential RMB250,000 to RMB350,000 pricing point? And how do we position within the pricing spectrum we want to target? Any color would be useful. Thank you.

 

He Xiaopeng: Alright. Thank you for the question. Actually, this is a topic that we have discussed internally multiple times and unfortunately I cannot give you all the information. However, what we can say is that we expect that by the second half of 2024, XPeng is going to launch multiple new models, as well as multiple facelift versions of previous models based on the same platform and it will be between RMB150,000 to RMB350,000 and that is because we actually have, from our previous experience, identified multiple market needs or demands or user demands for different price range in different models. They could be, you know, individual use or for smaller families and big families. And between RMB250,000 to RMB300,000 level, there are definitely, the space is very crowded and it is very, very competitive and there are different use or different demands. It could be individual customers, smaller or bigger families.

 

However, we are very glad to report that with our current big platform strategy using our SEPA2.0 platform, with our modular design, we can actually produce new models, meeting different demands in the market in a very high efficient manner using very low cost as well. So, definitely, a lot to look forward to in the future. Thank you.

 

Operator: Thank you. And the next question comes from Ming Hsun Lee with Bank of America.

 

Ming Lee: So, my question is related to your second quarter gross margin. So, besides a certain discounts and also the sales contribution from G9 is lower than the first quarter, is there any other reason why your gross margin declined Q-on-Q in the second quarter? Is there any non-cash item?

 

James Wu: Hey. Thank you. This is James. I’ll answer this question. So, you’re right. In Q2, as mentioned earlier, there’s a portion of the G3i EOP impact that we have booked in Q2. And I just want to emphasize that a majority of the impact is non-cash, that’s because of the acceleration of the unamortized tooling that we have booked because of the decision. Excluding the EOP impact, we still have a slight lower gross margin versus Q1.

 

That is mostly because of the increased promotional spend on some of the older models that we have. That is partially offset by lower battery cost that we’ve seen in the second quarter. And to your question, we have seen a pretty healthy improved cash flow in Q2, and we will continue to see that in the second half. Other than the profitability impact, a big impact will come from the working capital impact because as we increase volume, we will improve our collections from a delivery perspective and we will clear our payables in a stack basis. So, as we increase volume, we will have a considerable working capital gain in the second half, which will help to improve our operating cash flow. Thanks.

 

Ming Lee: So, my second question is for the fast charging battery. So, in the past, your G9, you already start to sell the 4C NCM battery on your G9, but at the time, the sales portion is really small probably because the battery is expensive and also the supercharging station is still not comprehensive enough. So, things, recently, there are some fast charging LFP battery in the market. So, will you start to discuss with your supplier to adopt such kind of battery in the future of your product to lower your cost?

 

Charles Zhang: Yeah. Thank you, Ming. This is Charles. So, first of all, when we mass produced the G9, we already provided the customers with the 3C, NCM, and also LFP battery as the standard configuration. And at the time of the mass production, it’s already the best in class and most fast charging technology in the market. And I think at this point, it’s still the best-in-class, fast charging technology in the market as well today. So, I think from the consumer perspective, first of all, we believe that the 3C, LFP and NCM battery present a very cost-competitive and also fast charging product and it is still very competitive in the market this year.

 

And to answer your question regarding the charging experiences, I want to clarify, yes, I think that the 3C battery, coupled with the 800-voltage platform, it can achieve the most fast charging technology on our 480-kilowatt supercharger, but I think I also want to clarify that even though on the standard charging pulse, I think 90% of the charging pulse in the market also support 800 voltage and also can support fast charging to our 800-voltage and the 3C battery powertrain technology. Yeah.

 

Ming Lee: Yeah. Thank you, Charles.

 

Operator: Thank you. And this does conclude the question-and-answer session. I would like to turn the call back over to the company for any closing comments.

 

Alex Xie: Once again for joining us today. If you have further questions, please feel free to contact XPeng’s investor relations through the contact information provided on our website or the Piacente Financial Communications.

 

Operator: Thank you. This concludes today’s conference call. You may now disconnect your lines. Thank you.

 

 

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