NIO (NYSE:NIO) held its second-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.

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Summary

NIO Inc. delivered 107,658 smart EVs in Q2 2026, marking a 49.4% year-over-year increase, with strong performance across NIO, Onvo, and Firefly brands.

Q2 2026 revenues reached 32.1 billion RMB, up 69.1% year-over-year; vehicle sales contributed 29.1 billion RMB, driven by increased deliveries and a favorable product mix.

Gross margin stood at 18.4%, with vehicle margin at 18.5%, despite rising raw material and chip costs. The company maintained positive operating cash flow and free cash flow, increasing cash reserves to 56.7 billion RMB.

Strategic initiatives included the launch of the flagship SUV ES9 and the rollout of a new version of their smart driving system to over 700,000 users, enhancing user experience and adoption.

NIO plans to expand its power swap network, having launched its 4,000th power swap station, and continues to explore value-added services such as electricity trading.

Management expressed confidence in maintaining vehicle gross margins despite cost pressures and indicated a focus on brand growth and strategic product launches in 2027.

The company anticipates achieving a monthly delivery average of over 40,000 units in Q4 2026 and expects annual volume growth of 40-50% over the mid to long term.

Full Transcript

OPERATOR

Hello ladies and gentlemen. Thank you for standing by for NIO Inc. second quarter 2026 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, Mr. Roy Chen, AVP and Head of Investor Relations, Corporate Finance and Strategic Investment of the Company. Please go ahead, Roy.

Roy Chen, AVP and Head of Investor Relations, Corporate Finance and Strategic Investment

Good morning and good evening everyone. Welcome to NIO's second quarter 2026 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call we have Mr. William Li, founder, Chairman of the Board and Chief Executive Officer, and Ms. Danny Chu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from views expressed today. Further information regarding risks and uncertainties is included in certain filings of the Company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited.

The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

William Li — Founder, Chairman & CEO

Hello everyone and thank you for joining NIO Inc.'s 2026 Q2 earnings call. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the NIO, Onvo and Firefly brands all achieved year-over-year and quarter-over-quarter growth in both sales volume and average transaction price. More specifically, the NIO brand delivered 60,945 vehicles, leading China's passenger vehicle market with transaction prices above 350,000 RMB across all powertrain types.

The Onvo brand delivered 29,124 vehicles, demonstrating strong growth momentum, and the Firefly brand delivered 17,589 vehicles, maintaining its leadership in the high-end compact car market. In July and August, the company delivered 35,934 and 35,836 vehicles, respectively. In Q3, the total deliveries are expected to range between 108,000 and 111,000 units. On the financial side, in Q2, the company's gross margin stood at 18.4%, driven by continued strong performance from the higher-margin products and ongoing cost optimization.

Despite pressure from sharply rising raw material and chip costs, the vehicle gross margin remained solid at 18.5%. The gross margin of other sales was 17%, with services and community-related businesses continuing to contribute to profitability. In Q2, the company continued to generate non-GAAP operating profit as well as positive operating cash flow and free cash flow, further increasing its cash reserves to 56.7 billion RMB. This helped strengthen the company's business fundamentals while laying solid groundwork for its long-term sustainable development.

Now turning to our product R&D and operations. For the NIO brand, on July 9, the flagship SUV ES9 launched and began deliveries of the five-seat version, catering to more diverse user needs and scenarios. With its five-seat layout and spacious interior, the ES8 has maintained strong momentum since launch and achieved the 140,000 units delivery milestone in just 335 days, leading China's passenger vehicle segment in the 400,000 RMB price range and the large SUV segment.

In the Net Promoter Score survey by Lan Roads, the new ES8 achieved the highest NPS among BEVs, ranking first in both sales volume and product reputation. In the meantime, the flagship executive SUV ES9, which began deliveries in late May, has started winning over users from traditional luxury fuel-powered SUVs, leading in sales volume among passenger vehicles with transaction prices above 500,000 RMB in June and July. The continued strong performance of NIO brand flagship models has further strengthened its leading position in the premium BEV market.

For the Onvo brand, the L90 surpassed 60,000 deliveries within its first year since launch, ranking number one among the large battery electric SUVs priced around 300,000 RMB. The L80 continued to see steady deliveries, winning broad recommendations with its exceptional cargo space and scenario-based functionality. In Q2, leveraging the outstanding product strength of the L90 and L80, the Onvo brand became the sales leader among large SUVs priced below 300,000 RMB.

In addition, the upgraded L60 better meets the needs of its target users, further strengthening Onvo's sales momentum. The Firefly brand has been number one in market share among high-end compact cars for 15 consecutive months, maintaining its leadership in the segment. Its precise product positioning and unique brand identity continue to win the hearts of target users. In terms of smart driving, on June 18, the latest version of the world model was rolled out to over 700,000 users as the second major release this year.

The new version further leveraged the world model architecture and closed-loop reinforcement learning, delivering significant enhancements in functionality and user experience. User adoption has continued to grow since the upgrade. Users' mileage with Urban NOA has increased by 92.8%. The upgrade also covered all onboard users, whose mileage with Urban NOA increased by 127.8% following the upgrade. Powered by leading model algorithms, systematic architecture and strong engineering capabilities, NIO is the industry's first car company to develop and roll out smart driving systems in parallel across general-purpose and proprietary chip platforms.

With a common software branch and synchronized releases, users across different technology platforms and brands can enjoy a continuously evolving, industry-leading smart driving experience throughout the vehicle life cycle. On the sales and service front, so far the company has 165 NIO Houses, 376 NIO Spaces, 441 Onvo stores, as well as 420 service centers and 93 delivery centers. In J.D. Power's 2026 Customer Service Index study for NEVs, the NIO brand ranked number one among both premium brands and Chinese brands, maintaining its top position since the rankings were first introduced.

Our high-quality services have earned widespread recognition from both the industry and users. In terms of the power network, at present the company has 4,123 power swap stations and 30,294 power chargers and destination chargers worldwide. On August 7, NIO's 4,000th power swap station went live, marking the launch of its first fifth-generation station. The fifth generation can support battery swaps for all models of NIO, Onvo, and Firefly, covering a wide range of vehicle sizes from compact cars to full-size SUVs.

With significantly enhanced operational and service efficiency, the fifth-generation station is able to provide enhanced external services and support open operations. Leveraging standardized power operations at scale, the company is also exploring value-added businesses such as electricity trading, further unlocking the commercial value of battery swapping. On July 23, NIO was named by TIME magazine as one of the world's most sustainable companies of 2026, becoming the only Chinese automaker on the list.

We will continue to advance our BEV roadmap, shaping a more sustainable and brighter future with our users. As China's automotive market enters a new phase of competition, the landscape is undergoing several important changes. First, with the rapid growth of BEV penetration, BEVs have become a mainstream powertrain in the market. Second, the industry is moving from a period of brand ambiguity toward greater brand clarity, with brand becoming an increasingly important factor in consumers' purchasing decisions.

Third, the final round of competition is shifting from product-level competition to competition in comprehensive system capabilities. For years we have remained committed to the premium BEV strategy and have been building our system capabilities. This puts us well aligned with the industry's evolution and positions us for a new phase of high-quality growth. We are confident in achieving our operating targets. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details.

Over to you, Stanley.

Roy Chen, AVP and Head of Investor Relations, Corporate Finance and Strategic Investment

Thank you, William. Let's now review our key financial results for the second quarter of 2026. Our total revenues reached 32.1 billion RMB, up 69.1% year over year and 25.9% quarter over quarter. Vehicle sales were 29.1 billion RMB, up 80.1% year over year and 27.5% quarter over quarter. The year-over-year growth was mainly due to the increased deliveries and a higher average selling price driven by a more favorable product mix. The quarter-over-quarter increase was driven by higher deliveries.

Other sales were 3.1 billion RMB, up 7.2% year over year and 12% quarter over quarter. The year-over-year growth was driven by increased sales of parts, accessories, and after-sales vehicle services, partially offset by decreased sales of used cars and technical research and development services. The quarter-over-quarter increase was due to an increase in revenues from used car sales and parts, accessories, and after-sales vehicle services. Looking at margins, vehicle margin was 18.5% compared with 10.3% in Q2 last year and 18.8% last quarter.

The year-over-year improvement was driven by a more favorable product mix, while quarter-over-quarter vehicle margin remained stable. Overall gross margin was 18.4% versus 10% in Q2 last year and 19% last quarter. The year-over-year increase was mainly due to the increased vehicle margin, and the quarter-over-quarter slight decrease was mainly due to gross margins from other sales, provision of power solutions, and sales of parts, accessories, and after-sales.

Turning to OPEX, R&D expenses were 2.1 billion RMB, decreased 28.7% year over year and increased 13.8% quarter over quarter. The year-over-year decrease was mainly driven by lower personnel costs in R&D functions due to organizational optimization, reduced design and development costs from different development stages, and improved operational efficiency. The quarter-over-quarter increase was mainly due to the incremental design and development costs for new products and technologies, as well as the increased personnel cost in research and development functions.

SG&A expenses were 4.4 billion RMB, increased 11.6% year over year and 22.5% quarter over quarter. The year-over-year increase was mainly driven by increased sales and marketing activities associated with new product launches, while the quarter-over-quarter increase also reflected increased sales and marketing activities associated with new product launches, as well as higher personnel and related costs for marketing functions and share-based compensation for general corporate functions.

Loss from operations was 0.3 billion RMB, down 92.9% year over year and up 12.4% quarter over quarter. Excluding share-based compensation expenses, adjusted profit from operations was 0.2 billion RMB. Net loss was 0.5 billion RMB, showing a decrease of 89.4% year over year and an increase of 59% quarter over quarter. Excluding share-based compensation expenses, adjusted net profit was 26.1 million RMB. Furthermore, our positive operating cash flow grew substantially, and we achieved positive free cash flow.

Our cash position strengthened further with 56.7 billion RMB in total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits. That wraps up our prepared remarks. For more information and details of our unaudited second quarter financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q&A session. Operator, thank you.

OPERATOR

Thank you. If you wish to ask a question, please press Star-1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star-2. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. Your first question comes from Bin Wang with Deutsche Bank.

Bin Wang, Analyst at Deutsche Bank

Thank you. My question is about the order flow sustainability for your ES8 and ES9 SUVs. We noticed in the premium SUV market some of your peers' competitors only show life for a few months. So can you explain why that is and how NIO differentiates facing the competition in the high-end premium SUV market? Thank you.

William Li — Founder, Chairman & CEO

Yes. Thank you for the question regarding new flagship models including the ES8 and ES9. We continue to see strong demand for the ES8. In August we delivered around 10,099 units, and in 11 months we have delivered more than 140,000. And in September it's going to witness its next milestone of 150,000 deliveries, which means that in less than one year since its launch it has already surpassed 150,000 unit deliveries. So the demand for the models is pretty strong.

As previously we've talked about, products are quickly iterated and introduced in the Chinese automotive market, where for a new model in the market it's difficult to last in popularity and attention. But for the ES8 it may be the first model that is breaking away from this market trend. And regarding our flagship executive SUV, ES9, it also sees strong demand since its launch, especially for the Horizon Edition and the Signature Edition. Right now for users placing an order, they will need to wait for three months or nearly four months to pick up a new car.

And if we look at the sales number of the ES9 in August and July, I think July we were still consuming some pre-orders, but if we are making a comparison between the incremental orders in July and August, we actually have seen a growth from July to August. So we are also confident in the continuous popularity and demand for the ES9. Also, one thing worth noting is that around three quarters of the ES9 users are actually from non-existing NIO users, from users outside of the NIO user community.

This also shows that ES9 has successfully reached out to a broader user base. And there are several reasons for the popularity and the demand for the ES9. The first is technology innovation. On the ES9 we have introduced or debuted several dozens of industry-first or industry-leading technologies, and tech innovation is still so far a very important competitiveness and differentiation of our products. Secondly, the product definition has precisely catered to the needs of the users in the premium segment, especially users buying the car for their business needs and also for their family occasions, where our cars have catered to both their emotional as well as functional needs, and our users also speak highly of the product experience. And the third is the holistic and one-of-a-kind experience enabled by our charging and swapping network as well as our after-sales services, which are actually a systematic capability difficult to replicate by the competitors. According to the Land Road study on the aftermarket satisfaction on the new energy vehicles, we've been topping the list for three times consecutively, and also in J.D. Power's recent research in terms of the post-market satisfaction on the new energy vehicles, we are also ranking first for several years in a row. So for the premium segment such experience centering on the services and post-market services is also very important. And the fourth one is, as previously talked about, the entire automotive market is now shifting from a period of brand ambiguity to a period of brand clarity, where users' purchasing decisions were previously largely based on the specifications of a product and now their decision is mostly driven by the brand.

In that case, NIO has also established a pretty solid foothold and clear brand awareness in the premium battery electric vehicle market. Among many users, they naturally believe that if they are going to choose a car to replace their existing Mercedes, BMW, and Audi, then NIO will be their natural choice. And if they are looking for a premium BEV model, then NIO is also their go-to car. Among our existing NIO users, we have also studied their purchasing decision where we find that the brand reputation and awareness is already accounted for more than 30% of their purchasing decision.

This has further proven our solid foothold in the premium BEV market. And if we further look at the numbers by the insurance associations, in Q2 the average selling price of the NIO brand was 406,000 RMB, far higher than the prices of Mercedes, BMW, and Audi and ranking first among all the mainstream premium brands. And in July the average selling price of the NIO brand was over 430,000 RMB. We believe that the scarcity of such premiumness of our brand as well as the competitiveness of our brands across all three brands will also become a long-term foundation for our competitiveness going into the future.

Thank you, Wang Bin.

Bin Wang, Analyst at Deutsche Bank

Thank you.

OPERATOR

Your next question comes from Tim Hsao with Morgan Stanley.

Tim Hsao, Analyst at Morgan Stanley

Hi, this is Tim from Morgan Stanley. Thanks for taking my questions, and congrats on the third consecutive profit. I have two questions. The first one is about ONVO, because compared to the robust growth of the NIO and Firefly brands, we noticed ONVO's customer conversion and order momentum have been relatively moderate to date since launch. So just want to know how is the progress in recent adjustments to customer incentives and the selling strategies?

And looking forward, what further changes would management plan to effectively improve ONVO's order momentum? Yeah, that's my first question. Thank you.

William Li — Founder, Chairman & CEO

Thank you for the question. It’s true that ONVO is actually in a more competitive market than NIO and Firefly, where the intensity level of competition in terms of the number of brands and also the number of models is much more intense than that of NIO and Firefly. But if we look at ONVO’s overarching performance since its launch, especially from its specific segment and market, it has actually made some good progress and achievements. If we look at the average selling price of the ONVO products, as we all know, the passenger vehicle market in the first half of this year was a bit challenging, and even amid these challenges, ONVO still achieved an average selling price of 240,000 RMB, achieving also significant growth year over year. In the first half of this year in China’s automotive market, only eight brands managed to achieve increases both in their sales volume as well as the average selling price, where ONVO is one of these eight brands. So in terms of the average selling price, ONVO is even outperforming some traditional luxury brands. So if we perceive ONVO as a premium family-oriented brand, it is actually achieving a pretty good baseline from this brand-definition perspective.

In terms of the overall product competitiveness, we also see some good progress and foundation, especially a good conversion rate from sales leads and opportunities all the way to orders, which means that when users get to know about the brand and products, it’s also more possible and likely for them to place an order on the ONVO product. So right now for the ONVO brand, the challenge is more about its overall brand awareness, where its current brand awareness is maybe comparable with NIO’s awareness around five to six years ago.

So right now our focus is also to enlarge the brand awareness and the popularity through different collaborations, offline activities, and engagement with more targeted communities. And the second action we are taking is to keep rolling out our Sky Stores, where we can host new ONVO and Firefly brands under the same roof. With that we are able to further expand our sales network and to really introduce our ONVO brand to more users in the lower-tier cities.

And the third action is also introducing new Onvo products so that we can reach a broader family user base. But in the meantime, we will still maintain Onvo's positioning as a premium, high-quality, family-oriented brand. So we will not be very aggressive in entering the entry-level segment. We will still strike a balance between the sales volume and the vehicle gross margin. Right now in the Chinese automotive market, we actually see a vacancy where there is no brand comparable with the upscale product lines of Toyota or Volkswagen that can serve the needs of family users.

This is where we see the opportunity for Onvo to develop its awareness in that specific segment.

OPERATOR

Tim, thank you.

Tim Hsao, Analyst at Morgan Stanley

Thank you, William, for sharing the details. My second question is a quick one. I just want to know if management can share next year's new model refresh and the key launch milestones for the NIO, Onvo, and Firefly, the three brands of the group. Yeah, that's it. Thank you.

William Li — Founder, Chairman & CEO

Thank you for the question. For the new brand, for next year we will be introducing new products coming from the 5 and 6 series product lines. I believe that the market is also aware of some of our latest plans, where for the Onvo brand next year we are going to introduce a major strategic new product that will also help to enrich our existing product lineup. And for the Firefly brand, we will keep the single-model strategy but keep rolling out special editions and technology upgrades.

So for Firefly, it's a bit like taking the iPhone approach, where it will stay the same product but with new additions.

OPERATOR

Thank you, Tim.

Tim Hsao, Analyst at Morgan Stanley

Thank you, Rayleigh.

OPERATOR

Your next question comes from Paul Gong with UBS.

Paul Gong, Analyst at UBS

Hi William, thanks for taking my question. My first question is regarding your vehicle gross margin outlook for the next two quarters amidst ongoing cost inflation. We are aware that the memory costs continue to go up, and I just want to listen to your thoughts. How does that impact the vehicle gross margin? Thank you.

OPERATOR

Thank you, Paul.

Paul Gong, Analyst at UBS

Thank you very much, William, Stanley, and congratulations for the achievements.

OPERATOR

Thank you. Your next question comes from Nick Lai with J.P. Morgan.

Nick Lai, Analyst at J.P. Morgan

Thank you for taking my question. My first question is financial-related. With very strong operating cash flow and free cash flow generation in the first half, can you remind us of our cash burn including CapEx and R&D, and what level of free cash flow can we anticipate by year end? And with a very strong cash position right now, can you remind us where we plan to invest or spend our cash in terms of CapEx and R&D? That's my first question. Thank you.

OPERATOR

Thank you, Nick.

Nick Lai, Analyst at J.P. Morgan

Thank you. My second question is ADAS-related. The market is indeed very, very competitive. Every peer offers the autopilot function or features. So I'm wondering, from a user standpoint, how do we differentiate ourselves from peers across our product offering from higher end to entry level? And at the same time, given high adoption or penetration right now, will we consider different payment options such as pay as you go or a subscription option in the future?

Thank you.

William Li — Founder, Chairman & CEO

Thank you for the question. This year people actually start to see the benefits and the advantage of our overall architecture featuring the New World model plus closed-loop reinforcement learning and collective intelligence. Especially considering that the actual computing investment and the computing power we use for the co-op training for autonomous and smart driving functionalities is relatively small, achieving such good experience with our latest release has proven the advantages of our technology roadmap.

As mentioned earlier today, on June 18th we pushed our latest New World model version to over 700,000 users across different brands and technology platforms simultaneously. This has also proven the advantages of our technology and architecture. Also, I would like to share some numbers with you. For the Sedar user—that's our third-generation platform equipped with the NX 9031 smart driving chip—among this group of users, around 58% of them have been engaging smart driving functionalities for more than half of their trips.

Regarding the business model for the smart driving service, right now for the NIO users and Onvo users we offer a five-year complimentary subscription to our smart driving capabilities and systems. But for used-car users, or when they expire on this five-year complimentary service, they will have to pay for the subscription. For the used-car users, they are paying 380 RMB per month for the smart driving subscription, where we now see a penetration rate of around 20% among these used-car users.

This is also a pretty sizable amount, showing the competitiveness of our product and experiences. Of course right now this is just a small user base, but for the longer term we believe this will be a sizable source of revenues for our business. Right now, every year the revenue from that part of the business is around several thousands of millions of RMB.

OPERATOR

Thank you.

Nick Lai, Analyst at J.P. Morgan

Very clear. Thank you.

OPERATOR

Your next question comes from Ming Soon Lee with B of A.

Ming, Analyst

Hi William, this is Ming. I also have two questions. First question is related to your fifth-generation battery swap station with more expansion of your new station, and this can accommodate all of your three brands. Could you give us more details regarding the CAPEX per station and also the maintenance cost compared to your previous-generation swap station? Besides that, right now you are also open to some other auto OEMs for your battery service.

Could you elaborate your pricing strategy and also your unit economy model? Yeah, thank you. That's my first question.

William Li — Founder, Chairman & CEO

Okay. Thank you for the question. Regarding the fifth-generation power swap station, we have adopted a flexible design where the station can accommodate all models from NIO, ONVO and Firefly, so basically it can be compatible with cars of different dimensions and sizes. In terms of the cost, we've also achieved continuous improvements on top of Gen 4, where in terms of the material costs we've achieved optimization and reduction in cost. And for per-station cost, if we exclude batteries in the station as well as all the costs related to the high-voltage power supply and energy preparation, if you only look at the station itself, it's around 1.4 million RMB per station. That is around 100,000 RMB cheaper than the fourth generation. In terms of the operations of the swap stations, we've also been making continuous improvements in terms of the actual people efficiency supporting the operations of all stations. We've made improvements in terms of the first-time-through of the power swaps as well as the software features. Between current performance as well as the performance earlier last year, it's already improved by 50%.

Of course for the fifth generation, as they are new to the field, we are still ramping up its first-time-through. But comparing with the previous generations around the same time frame, we already see quite significant improvement in terms of the success rate of our power swaps among the fifth-generation stations. Overall speaking, we also believe that the efficiency of fifth generation will be much better than the previous ones. And the third is regarding the partnership and also alliance with other OEMs regarding power swap.

Several years ago we've signed up with several OEMs regarding this power swap alliance and we still have ongoing communications and collaborations on some projects. In the meantime, as robotaxis are becoming a very popular area, we see power swap stations and power swap service in general can be good infrastructure support for the robotaxi business. So we are also exploring opportunities with our partners from that perspective. In terms of the cooperation framework and also how we charge them on such services, we basically will charge them the admission fee for the use and access to our power swap network, but more details are still being discussed and are to be closed when we have the actual project in implementation. And also for the entire new energy vehicle industry, it has been entering into this new stage where more and more people start to realize the benefits of power swap and more OEMs are also embracing the idea of swappable vehicles. For NIO Power, the advantage is with more partners joining this effort, it can help us optimize and amortize our operating costs, and by standardizing the battery packs we can also improve efficiency as well as optimize the cost structure.

OPERATOR

Thank you, Ming.

Ming, Analyst

My second question is related to your operating expense. Especially, we noticed that your sales and marketing expense in the second quarter is higher. Is it because you launched more new models during the quarter? Could you give more guidance for your 2026 operating expense? Thank you.

OPERATOR

Thank you, Ming. Your next question comes from Jing Cheng with CICC.

Jing Cheng, Analyst at CICC

Thank you for taking my question. Time is limited. I have only one question. We know that our Senior Vice President Mr. Ren Shaoqing has founded an embodied AI startup company in which we have made a strategic investment. So what are the long-term cooperation potentials between this new company and NIO and also what long-term value can it bring to our company?

William Li — Founder, Chairman & CEO

Thank you for the question. Yes, Mr. Ren Shaoqing, the head of our smart driving department, is now also starting up a new business regarding physical AI and embodied intelligence, and NIO is supporting his business as a strategic shareholder. In the meantime he will still be the head of our smart driving department, responsible for the overarching technology as well as the long-term tech roadmap for our products. We also think that such arrangement is necessary and meaningful, as right now NIO is staying focused on our core business.

But in the meantime, through this startup by Mr. Ren, we can also keep track of the latest developments in physical AI and embodied intelligence without diluting our focus or affecting our P&L. In the meantime, such startup can also help make full use of our resources as well as attract external strategic shareholders and investors. So we think this is a good arrangement. And also, as we all know, the competition for AI talent within the arena of physical AI is quite intense.

Through such startup we can also better capture the top-notch talents in the industry, and that will be beneficial to the long-term development of both this startup as well as for our AI-related business. For the long term, we believe that we will have a lot of strategic collaborations and projects between NIO and this AI startup. Yes, thank you.

Jing Cheng, Analyst at CICC

Thank you.

OPERATOR

Your next question comes from Yuking Ding with HSBC.

Yuking Ding, Analyst at HSBC

Thank you team. Hi Sally, so my question is, what's your volume outlook for this year?

OPERATOR

I think your voice is breaking. Can you repeat your question? Thanks.

Yuking Ding, Analyst at HSBC

Yeah, sure.

OPERATOR

We still can't hear you.

Yuking Ding, Analyst at HSBC

Yeah, can you hear me now?

OPERATOR

Yes, much better.

Yuking Ding, Analyst at HSBC

Hello? Okay. Yeah, yeah. So I just repeat: my question is about the volume outlook in fourth quarter and 2027, given maybe strong seasonality and the backdrop of new model cycle next year.

Sally

We expect the passenger vehicle market to be able to recover in Q4 this year. With that, our target for Q4 is achieving an average volume of over 40,000 units per month. And for the mid and long term, with our product lineup as well as our sales and service network coverage, we expect our annual volume growth to be around 40% to 50%, and we will maintain that for the mid and long term.

Yuking Ding, Analyst at HSBC

Thank you.

OPERATOR

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Roy Chen, AVP and Head of Investor Relations, Corporate Finance and Strategic Investment

Thank you again for joining us today. If you have further questions, please feel free to contact our IR team through the contact information on the website. This concludes the conference call. You may now disconnect your lines. Thank you.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.