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Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Fourth Quarter and Full-Year 2021 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I'll now turn the call over to your host, Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.
Thank you, Amber. Good evening, and good morning, everyone. Welcome to Li Auto's fourth quarter and full-year 2021 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 our President, Mr. Kevin Yanan Shen, and our CFO, Mr. Johnny Tie Li to begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li, will join for the Q&A discussion. Before I continue, please be 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 the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and announcements published on the website of the Hong Kong Stock Exchange and the company. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto'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 Li Auto's press release, interim results announcement and the fourth quarter and full-year 2021 results announcement, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.
Thank you, Janet. Hello, everyone, and thank you for joining our call today. 2021 was a pivotal year for new energy vehicle sales in China. During this year, China's auto industry witnessed a notable substitution of EVs for ICE, internal combustion engine vehicles. evidenced by NEV's rapid growth in contrast to the sluggish sales trend of ICE vehicles. This led to growing penetration of NEVs in overall passenger vehicle sales. According to China Passenger Car Association, in 2021, the retail sales of new energy passenger vehicles increased by 169% year-over-year to nearly 3 million, while ICE vehicle retail sales decreased by 5.6%. The penetration rate for retail sales of new energy passenger vehicles rose substantially to 20.8% in the fourth quarter of 2021 versus 12.6% and 5.8% for the first 9 months of 2021 and the full year of 2020. With mobility transformation trend pointing to increased smart electric vehicle use, we are proud to forge ahead as a pioneer. As an industry leader, we are ready to serve more families with continuing product and technological innovations. We achieved deliveries of 35,221 units in the fourth quarter of 2021, up 143.5% year-over-year, driving total revenue to RMB 10.6 billion or USD 1.7 billion, growing 156.1% year-over-year. The robust fourth quarter performance took our full-year deliveries to 90,491, up 177.4% year-over-year and the total revenues to RMB 27 billion or USD 4.1 billion, up 185.6% year-over-year. Li ONE was the first domestic ready premium model priced above RMB 300,000 in China to achieve the 10,000 monthly deliveries. In January 2022, we have delivered over 10,000 Li ONEs for the third consecutive month, achieving a new record. We believe this is another milestone for Li ONE to qualify as a blockbuster model and will be a benchmark for all our future models. We are excited to see Li ONE awaken the premium passenger vehicle market in China, targeting family users, and emerge as one of the best choices. We attribute our vehicle success to our outstanding product definition capabilities. The extended range 6-seater SUV has gone from being questioned to mainstream. while our 4-screen full vehicle interactive voice system has set a new industry benchmark. This further proves our users' recognition of Li ONE's pioneering energy replenishment solution adopting battery power for urban commuting and the recharge with range extender during long distance traveling and highlights our users' endorsement of the brand new in-vehicle driving and riding experience Li ONE offers in this autonomous era. Our product definition capability are built on the shared vision in our organization and a solid foundation of comprehensive capability, including technological strength, profound consumer insights and systematic execution. And we are confident we can apply this to our future models and continue to provide our users with solutions beyond what they have demanded. We aim to grow our model lineup significantly in the coming years while advancing our R&D efforts as product provides the competitiveness mode for business and the technology for the mode for product. While production and delivery improved as most of our chief supply chain partners resumed normal operations, challenges to the overall LEV supply chain will likely become long lasting, affecting chips, batteries and potential other auto parts given the accelerating development of the smart electric vehicle industry. Going forward, together with our supply chain partners, we will continue to work on multiple measures such as advanced planning and diversified supply chain to mitigate supply chain risk. In light of the ongoing industry-wide semiconductor shortage, we expect the total deliveries in the first quarter of 2022 to be between 30,000 to 32,000 vehicles. Turning to the financial side. We maintained strong performance with a robust and steady gross margin of 22.4% in the fourth quarter, growing 4.9% year-over-year. This was driven by our strong vehicle sales performance and consistently effective cost management measurement. Even as we accelerated the pace of R&D spending to 11.6% of revenue and grew our sales network by adding 53 retail stores in the fourth quarter, we achieved profitability as well as a record breaking RMB 3.8 billion operating cash flow, which is a significant reflection of our appreciating excellency. In 2021, we significantly expanded our direct sales and servicing network, almost quadrupling our number of retail stores to 206 in 102 cities from 52 in 41 cities as of the end of 2020. By the end of January, we had 220 retail stores in 105 cities as well as 276 servicing center and Li Auto authorized body and paint shops operating in 204 cities. We aim to provide our users with more convenient, efficient and standard purchasing and user experience by strengthening our online operations as well as continually adding physical platforms close to our users. We plan to further enlarge our footprint and the target reaching 400 retail stores by the end of this year to meet the growing market demand for NEV national wide supported by consumers' rising NEV adoption and our upcoming new model launches in 2022 and award. Moving to our product optimization and R&D efforts, in December 2021, we released the OTA 3.0 update to all our Li ONE users, further enhancing the in-car experience for both drivers and passengers. This upgrade includes the navigation on ADAS. and automatic emergency breaking AEB features, making us the third automotive OEM globally to develop its own full stack NOA capability. As of January 31, 2021, we have provided NOA to more than 70,000 family users. And during the Spring Festival holiday, we accumulated over 2 million kilometers of NOA millage with an ADAS-equipped user base as the leading scale in China. We will continue to increase the R&D of ADAS-related technology, and we believe we are well positioned to push the boundaries of assisted driving technologies. The upgraded AEB with vision perception algorithm enables Li ONE to identify road works and highway traffic accident sites and prompt users in advance to avoid major accidents. Li ONE was awarded 2021 Car of the Year by Li Xiang Tong Xue, a renowned auto information platform in China due to its outstanding AEB performance exhibited in the BCAR AEB test known as the most strict vehicle test in China by automotive professionals. During the test, Li ONE was the only assessed model in the final run capable of accurately identifying crossing vehicles and 2-wheelers. This further reflects our full stack sales development capabilities. The OTA 3.0 update also includes an upgraded version of the Li ONE smart in-car voice assistant, Li Xiang Tong Xue, which now recognizes and executes more voice instructions for in-car entertainment, navigation and the vehicle setting. We will continue to conduct R&D to develop safer cars with smarter product features that can be helpful for all members of the family, young and old, as we remain steadfast in our commitment to creating homes on the move that bring happiness to the entire family. We are also happy to share that we have been added to the Hang Seng Tech Index under the index newly added category of autonomous technology. The inclusion will take effect on March 7 this year. We have also been included in the Hang Seng composite large-cap Index since August 2021 as a technology leader in smart mobility. Our addition to the Hang Seng Tech Index endorses the strength of our full-stack self-developed ADAS and smart cabin technologies as well as recognizes our capability to create value for our investors. We look forward to bringing more families our Li ONE premium experience that offers safer, simpler driving with all the amenities and technology people want in a premium vehicle. In the second quarter of 2022, we will unveil our next mass-produced vehicle model, a full-size premium extended range electric SUV. Deliveries of this model will start in the third quarter of this year. In 2023, we plan to launch 2 BEV models that support ultra-fast charging. By then, our ultra high-voltage charging solution will be readily available to our users effectively shortening the charging time and addressing mileage anxiety. As we remain committed to developing new models, autonomous driving, smart cockpit and others, our R&D expense for 2021 tripled year-over-year to RMB 3.3 billion or USD 515.7 million, accounting for 12.2% of revenue. We will continue to expedite our R&D progress with the support of our expanding R&D team, which is comprised of more than 3,400 personnel as of the end of 2021, representing 139.8% year-over-year growth. We target to maintain our R&D investment at the level of 10% of revenue and above going forward. Turning to our production capacity. We are expanding our capacity at the Changzhou factory and constructing our Beijing manufacturing base. Once the expansion and construction are completed, the design production capacity at these 2 manufacturing sites will reach 500,000 units annually in 2023 and around 750,000 with double shifts. Meanwhile, we are excited to share that in December 2021, we entered into a strategic cooperation framework with the Chongqing municipal government for establishing our new manufacturing base. We will make relevant disclosure of the Chongqing manufacturing base when appropriate. The enhanced production capacity together with our enriched product lineup will position us well to capture an increasing share of the booming EV market, laying a solid foundation for our strong growth in the years to come. With the launch of our second major vehicle just around the corner and continued strength in order for our Li ONE, we expect 2022 will be another pivotal year of growth for Li ONE -- for Li Auto. Our pioneering spirit tells us to keep pushing the boundary of what is possible and that what we are doing. The market is right for advancement, and we are in the right place at the right time with the right strategy, the right skill sets, the right business model and the right vehicle to drive us to the next destination. In 2022, we expect the NEV market to see its greatest number of drivers yet, and we are all ready for it. Now I will turn this call over to our CFO Mr. Tie Li to review our financial performance in the fourth quarter.
Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the fourth quarter of 2021. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the fourth quarter of 2021 were RMB 10.62 billion or USD 1.67 billion, representing an increase of 156.1% from RMB 4.15 billion in the fourth quarter of 2020, and increase of 36.6% from RMB 7.78 billion in the third quarter of 2021. This included RMB 10.38 billion or USD 1.63 billion from vehicle sales, which increased 155.7% year-over-year. and 40.5% quarter-over-quarter. The increase over the fourth quarter of 2020 and the third quarter of 2021 was mainly due to the increase of vehicle deliveries in the fourth quarter. Revenues from other sales and services were RMB 244.7 million or USD 38.4 million in the fourth quarter of 2021, representing an increase of 174.5% year-over-year and a decrease of 37.1% quarter-over-quarter. The year-over-year increase in revenue from other sales and services was mainly attributable to increased sales of charging stores, accessories and services in line with higher accumulated vehicle sales. The decrease in revenue from other sales and services over the third quarter of 2021 was due to the sales of automotive regulatory credits in the third quarter, which didn't recur in the fourth quarter. Cost of sales in the fourth quarter of 2021 was RMB 8.24 billion or USD 1.29 billion, representing an increase of 140.8% year-over-year, an increase of 38.2% quarter-over-quarter. Gross profit in the fourth quarter of 2021 was RMB 2.38 billion or USD 373.5 million. growing 228.5% compared with the fourth quarter of 2020 and 31.3% compared with the third quarter of 2021. Vehicle margin in the fourth quarter 2021 was 22.3% compared with 17.1% in the fourth quarter of 2020, and 21.1% in the third quarter of 2021. The increase in vehicle margin over the fourth quarter of 2020 was primarily driven by higher average selling price attributable to the increase of vehicle deliveries of our 2021 Li ONE since its release in May. Our gross margin in the fourth quarter of 2021 was 22.4% compared with 17.5% in the fourth quarter of 2020 and 23.3% in the third quarter of 2021. Operating expenses in the fourth quarter of 2021 were RMB 2.36 billion or USD 369.7 million, representing an increase of 193.2% year-over-year, and a increase of 23.4% quarter-over-quarter. Research and development expenses in the fourth quarter of 2021 were RMB 1.23 billion or USD 193 million. representing an increase of 228.7% year-over-year, and an increase of 38.4% quarter-over-quarter. The increase in research and development expenses over the fourth quarter of 2022 (sic) [ 2021 ] and the third quarter of 2021 was primarily driven by increased employee compensation as a result of growing number of research and development staff as well as increased costs associated with new product development. Selling, general and administrative expenses in the fourth quarter of 2021 were RMB 1.13 billion or USD 176.7 million representing an increase of 162.2% year-over-year and an increase of 10.2% quarter-over-quarter. The increase over the fourth quarter of 2020 was primarily driven by increased employee compensation as a result of growing number of staff as well as increased marketing and promotion activities and the rental expenses associated with the expansion of the company's distribution network. Income from operations in the fourth quarter of 2021 was RMB 24.1 million or USD 3.8 million compared with RMB 78.9 million loss from operations in the fourth quarter of 2020 and RMB 97.8 million loss from operations in the third quarter of 2021. Net income in the fourth quarter of 2021 was RMB 295.5 million or USD 46.4 million compared with RMB 107.5 million net income in the fourth quarter of 2020 and RMB 21.5 million net loss in the third quarter of 2021. And now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits and short-term investments, totaled RMB 50.16 billion or USD 7.87 billion as of December 31, 2021. Operating cash flow in the fourth quarter of 2021 was RMB 3.84 billion or USD 602.1 million. Free cash flow was RMB 1.62 billion or USD 253.5 million in the fourth quarter of 2021. As of December 31, 2021, we had a total of 11,901 employees. For more of our 2021 full-year financial results, please refer to our earnings release for further detail. And now for our business outlook. For the first quarter of 2022, the company expects the deliveries to be between 30,000 and 32,000 vehicles, representing an increase of 138.5% to 154.4% from the first quarter of 2021. The company also expects the first quarter total revenues to be between RMB 8.84 billion and RMB 9.43 billion or USD 1.39 billion and USD 1.48 billion, representing an increase of 147.2% to 163.7% from the first quarter of 2021. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, including the ongoing industry-wide semiconductor shortage, which are all subject to change. I will now turn the call over to the operator to start our Q&A session. Thank you.
Thank you. We will now begin the Question-and-Answer Session. [Operator Instructions] Our first question comes from the line of Fei Fang from Goldman Sachs.
Great. Let me ask my questions in Chinese first, and I'll translate into English. [Foreign Language] Now let me just quickly translate into English. The Chinese new energy vehicle industry had various product launches in the past 12 months, some were successful. Some didn't really quite work out. So what have you learned from the industry? And what do you think are the critical factors for products to succeed? The second question is on manufacturing capacity and store openings with 750,000 units production capacity by the end of 2023, 400 stores by the end of this year, these are ambitious targets. There's a large number from where you are right now. So does it mean that you are ready to scale up new products after unveiling those in the rest of the year?
[Foreign Language]
[Interpreted] First of all, this is Li Xiang -- I'm translating for Li Xiang. I would like to answer this question as a product manager myself. In fact, in the industry, there's a very established private logic. We start with the users. The users care about 2 things. First of all, is their own needs and there are 3 levels of needs, starting with the first level, which is their superficial needs. And then going down further, there's the hidden needs and eventually, there are needs that the users don't even know themselves. So first of all, we need to understand these needs very well. And the second point is the price point that they're willing to buy our products at. And with these things, we can basically draw a circle. And as a product manager, our goal is to build products that will overlap as much as possible with this circle of user needs. And the product really focuses on 5 different things. The first one is product performance. We need to deliver a product that performs well on many different levels. And secondly, is safety and security. Third is quality. Fourth is price, and fifth is supply, especially in an industry that's been growing so rapidly, supply is especially important as has been seen in the industry in the past few years. So overall, if we can build a product that can balance these 5 factors and match with the circle of user needs, then the bigger the overlap, the greater the sales. And on the contrary, if the overlap is very small, no matter what the vision is from the company's standpoint, sales will always suffer. So we believe a good product performance is never a coincidence. It's based on very established and solid product capabilities of the company.
So, this is Kevin. Let me take the second question about our preparation for the coming years. Actually, we have a very strong confidence in our new products that we're going to launch in this year and next year. Therefore, we are very aggressive in terms of getting our capacity prepared. Right now, from the sales side, we -- as mentioned, we have a 400 store plans by the end of this year. We'll have more next year. And also not only in store, but also human resources of the sales force, we are also preparing. -- from the capacity perspective, actually not only our own capacity, we are working with our supply chain partners to adding capacity in their factories also. And also, as we should all know that the IC supply is constrained. So therefore, we already started to secure upstream IC resources by giving advanced planning to our supply chain partners.
Our next question comes from Tim Hsiao from Morgan Stanley.
[Foreign Language] So just 2 quick questions. The first question is about our ecosystem strategy. We noticed several start-up peers start or planning to expand the operations go up into non-vehicle business, for example, like smartphone manufacturing or firing vehicles in order to broaden and enhance their user ecosystem of the Smart EV. So from Li Auto's perspective, how should we think about the company's next step of ecosystem development? And my second question is about the cost management is, we expect the general inflation or price hikes of the batteries and other key materials to continue this year. So how should we gauge the potential impact? Any quantitative information we can take as a reference where we assess the potential impact?
[Foreign Language]
[Interpreted] As the founder of the company, we have been focused from day 1 on the smart electric vehicle market, and we believe that we've just finished our 0 to 1 stage, and there's still way too many things for us to focus on than to expand into other sectors. So there are many things that we can do on the product application technology and system levels that I believe will take the next 5 to 10 years for us to complete, and we will be very focused on this market going forward for at least the next 10 years. And we believe that in 10 years, we can reach the level where Apple is in smartphones and smart devices. So that's our overall strategy. And then speaking about space, the in-car space. There are so many things to do. We're not talking about expanding into other types of space because we believe that even for the space in car, there are still many things to do. One of the opportunities is the experience is for activities where the experience is still not as perfect in other space, we believe there's enough opportunity to move them into cars. And because of our integration capabilities and because we can fully control many of the hardware and software, we can provide much better experience than they are the way it is elsewhere, including content and hardware, these are all big opportunities to tackle that we will continue to focus on in the foreseeable future.
Tim, this is Kevin. Let me take the second question about the cost challenge. In fact, when we plan for this year's financial budget, actually, we already took into consideration of the potential cost increase, especially as we should all know that the battery is going to -- the cost will increase. Yes. On the other hand, but actually, with volumes substantially increased this year, also, we will achieve more economy of scale. So therefore, overall, we are -- although we have many challenges, but we are still targeting to achieve a higher margin -- gross margin than last year.
Our next question comes from Bin Wang from Credit Suisse.
[Foreign Language] Actually I have got -- there was more questions. Number one is about the mention in the March 7, you actually got elected for the Hang Seng Technology Index. That does means you could be eligible for the Shenzhen Hong Kong stock connect to get a source for money, that's number one. And number 2 is about NEV credit, you're actually booking around RMB 200 million revenue for NEV credit in the '21. So you guess what's the rough amount in '22 because you got almost more than 100% growth in '21. That is what's helped for the margin and profit. And last one, I think you got an announcement today that the CTO is leaving. Can you explain what's the reason behind the CTO leaving?
And this is Shen, thank you Wang Bi. And first of all for the Connect, according to the latest press release by Hang Seng Index, we have been included in the large-cap index and also to be included in the Connect, we need to meet relevant requirements on market cap and transaction volume. And we expect to be included in the Connect in middle March after we are listed for 6 months and plus 20 transaction days. Yes, it will be around that. And for the NEV credit for 2021, we have over about 2 to 3x of our EV scores comparing with 2022 as you got from the sales volume. But as everyone may aware, the per-score price will be lower than last year. So we are still negotiating with the potential buyer of those EV cars. Hopefully, that will come out around the third quarter, just like last year, yes. And for the CTO's question, I think we can just refer to the press release.
Our next question comes from the line of Ming-Hsun Lee from Bank of America.
[Foreign Language] So I have 2 questions. The first question is how do you see the supply chain management and also the chip supply situation in 2022? And the second question, with just OTA, the NOA last year, how do you think -- what is the most important function for next step for you to offer to your customers to enhance the user experience?
Lee, this is Kevin. Let me take the first question. In fact, we are also impacted by the Bosch supply this month and also last month. Not only the IC shortage from ST, but also the COVID-19 hit Suzhou. So going forward, in the coming months, actually, we see the situation, we're getting improved, but still supply will be very tight. So we'll continue to do what we have been doing, first, qualify more supplies, second give advance training to our supply chain partners. Third, basically to increase our own production flexibility so that whenever the supply is available, we can very quickly turn it into a final product to deliver to our customers. Yes. Second question.
[Foreign Language]
[Interpreted] Since we started delivering NOA feature on our 2021 model year Li ONE, we completed the full feature delivery release on the model by the end of last year. And our goal has always been to deliver good experience for the customers. And there's actually a large amount of work for us to deliver this good experience, including adapting HD Map and continue to fine tune. So we will continue this work to continue to improve -- make improvements in safety. And our goal is to increase safety standards across the entire driving experience, not just when the car is in NOA mode. So -- which is the reason why we started to develop many of the technologies in-house. And our ultimate goal is to increase safety by decreasing accidents by 80% across the entire life cycle of our vehicles, which is why we make the feature standard and continue to iterate the feature over time. So the above is about the current solution on our Li ONE, which runs on 2 Horizon J3 chips. And speaking of X01, which will be launched this year, there will be significant improvements not only in sensors but also in computing power and safety redundancies. It will bring the safety of the entire vehicle over the life cycle to a whole new level. And it will make the drivers and their families safe, not only when the car is in NOA mode, but also when the driver is driving themselves.
Our next question comes from Paul Gong from UBS.
[Foreign Language] So 2 questions. The first one is regarding the future differentiation. Right now, the several EV start-ups all have the uniqueness. How do you think, going forward, when everyone is working on the autonomous driving, everyone is going to use LiDAR, everyone is going to produce a BEV as well, so what would be the key competitiveness by then? Is it further innovation? Is it a revolution of the technology? Or is it more focused on the efficiency of the operation? And the second question is regarding the globalization. We have observed that some peers has already expanded to European markets. How does Li Auto think of the globalization both in the near-term plan as well as in the long run?
[Foreign Language]
[Interpreted] By the end of 2021, we pretty much validate ourselves and finish the -- completed the 0 to 1 stage as a company. We've been focusing on -- we've been validating we've been validating ourselves in the family new buyers market and pretty much established the industry ceiling as the #1 seller in the medium to large-sized SUV market. And our key recipe for this success is our focus on the family market, our efficiency, our R&D capabilities and our software R&D capabilities. This is validated through sales and having -- while having a very low SG&A expense level. And in the next couple of years, we'll be completing our 1 to 10 stage as many of you are well aware of 25 goals in volume and margins. And so to reach this goal, we will continue to play to our strength, which is 2 things. One is we will -- we understand the family market very well, and we will expand our product line across the RMB 200,000 to RMB 500,000 price range by providing our products to more families in more segments and markets. The second one is our efficiency and R&D capabilities. As you can see, our R&D and new store opening pace has been on par with many of our competitors. But in the meantime, we're still delivering very healthy and profitable financial results. In the meantime, which we admit, we have many weaknesses, which is what we'll be working on over the next few years. First of all, is R&D. We will -- we actually have already made many improvements. We brought in our tonnes driving and voice recognition in-house by building a very strong talented team. In the meantime, we've established our knee capabilities in zonal controllers like e-architecture, all of these are brought in-house today. So we believe that we will continue to build these R&D capabilities in the technical area. In the meantime, the other weakness has been the supply area we want to work on is supply, given the growth in the market, we'll be working on supply and as well as manufacturing capabilities. And finally, on the topic of intelligent technologies, we believe that there is no shortcut in the market. One thing we've observed with intelligent technology is that it has 3 characteristics. First of all, users have no particular feeling of the technology when they buy the product. And secondly, if the experience is bad after they buy the product, they will very easily give up the product and lose all their confidence. And thirdly, if the product is actually good, they will very quickly find out that they cannot live without the product. So to make sure that we can deliver competitive products in the intelligent technology area, we will focus on 3 capabilities, which we have -- we believe the company is very well established. First of all is the product capability. It's very important to understand the user needs and continue to deliver products that will exceed their needs. And second one is software and AI capabilities, which ultimately is the competition on talent, the bench of talent. We believe that most successful companies are the ones that can attract the best talents, are the ones where the best talent will like -- will most prefer to work in. And the third one is state system capabilities and more specifically, the ability to develop operating systems. And we believe with these 3 capabilities, we will be able to maintain our core competency in both autonomous driving and intelligent cockpit. Thank you.
Paul, let me take the second question about the globalization. So basically, for our long-term strategy, we believe we will ultimately compete in the global market. That's for sure. And for the very near future, very near term, we want to focus on the China market now. And as I mentioned several times, we already have a dedicated team for the globalization strategy. We are doing 3 things: first, to identify the potential market for our product. second to analyze what will be the right product mix for this product. And the third, how to develop a business model so that we can achieve a meaningful market share when we enter this market. So right now, this team -- dedicated team is still developing the overall strategy.
Our next question comes from Yingbo Xu from CITIC.
[Foreign Language] I have 2 questions about the product. One is about, we see the penetration rate of EV goes higher than similar like 20%. And that means more consumers understand more about electronic vehicles or smart vehicles. So what kind of change would that take for the users? And also, we know that -- could you please give us more color about X01? And then second question is about the BEV product that will be launched next year. We think that from ERV to BEV is a huge change. Could you please give us some discretion on expectations of this new product.
[Foreign Language]
[Interpreted] First of all, on the first question, as we reach higher penetrations in new energy vehicle market, it's actually good news for the company. The same product methodology will continue to apply. And as I said earlier, as we observed our users, there are 3 levels of niche demand. The first level are the explicit demands. The second level are the implicit demand, many of which are their pain points. And the third level are demands that they don't even know exist. The way we observe this demand is as we analyze and observe the users on rational and emotional levels and understand what they want and build products that will exceed their needs. And talking about the X01, our core theme has been to 2 things. One thing is to upgrade things that users really wanted on Li ONE and wanted to add to their Li ONE product. And secondly, we're delivering on new demands that are not yet met in the market today. These are things that users do not even realize that they want, but the moment that they see their products, they realize this is what I actually wanted. So the methodology will continue to remain the way it is, although the user needs are changing, and we will continue to follow that very closely. So these are some comments on our -- the next new vehicle on our range extended vehicle platforms. Next, I'll make a few comments on the electric vehicle market -- electric vehicle product. So the electric vehicle we will focus on 3 different things. First of all, is a foresee charging capability. And this most important -- the most important component will be the battery. We've actually spent a lot of efforts to co-develop the battery with our key supplier because the entire architecture and sales and charging capability, heat management system will all be different. So we've done extensive work in this area to ensure that the mass production of this battery will be successful. The second component of our high-voltage platform is the 850 volt EV platform. which includes many different things ranging from electric motors integrated integrating DCDC of rising voltage, lowering voltage, heat management, battery management system. All these things have never been provided before as a company. And the third thing is a 400-kilowatt charging station and charging poles. We've done a lot of work to develop these charging poles to ensure that we can provide seamless experience for our user, which connects the battery, the vehicle platform and the charging station. With these products, we'll be able to charge the cars in 10 minutes and deliver 400 kilometers of range.
Our next question comes from Jiong Shao from Barclays.
[Foreign Language] My question is really about strategic positioning and product positioning. The management talked about the focus on having the best product for the family use. Is the family sort of use case still the focus, remain the focus for the new products, including the BEV products? If it is, would that be enough for the sort of longer-term sustainable growth and strategic positioning for the company?
[Foreign Language]
[Interpreted] So the answer is yes, we'll continue to focus on this market because we previously only validate ourselves at one particular price point in this market. But if you look at the entire market, when we define the NEV 1 product in 2016, the market size is only about 2 million units annually. And last year, the market has grown to 6 million, and we expect that by 2025, the market size will reach 10 million units per year. So this is a very healthy market. But for 3 reasons. One, is it has very big growth, as we talked about earlier. And second is that there's enough BOM or bill of materials in the market for us to deliver good experience for the users. And thirdly, it can still deliver very healthy gross margin for us as a company. So we believe this is a very attractive market that we'll continue to focus on. So far, we've only really taken a very small scoop from the market, accounting for about 2% market share in the market. Here, we're talking about all passenger vehicle markets, not just NEV because we believe Li ONE not only compete with new energy vehicles, but we have the potential to replace existing -- all existing passenger vehicles above RMB 200,000 R&D price point. So there's still much work to do, and our goal is to eventually reach at least 20% of the market, which is the time by which we will have finished our 1 to 10 stage as a company.
So as we reach the end of our conference call, I would like to turn the call back to the company for closing remarks. Ms. Janet Zhang, please go ahead.
Thank you once again for joining with us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. Then, that's all for today. Hope you have a great weekend.
Thank you. This does conclude our conference for today. Thank you for participating. You may all disconnect.