NIO Inc

NYSE:NIO

Q3-2025 Earnings Call

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions].

I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations and Corporate Finance of the company. Please go ahead, Rui.

[Rui Chen, executive]

Good morning and good evening, everyone. Welcome to NIO's Third Quarter 2025 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 Mr. Stanley Qu, 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 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, 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 may conclude 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 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.

[Bin Li, executive]

[Interpreted] Hello, everyone, and thank you for joining NIO's 2025 Q3 earnings call.

In Q3 2025, the company delivered 87,071 smart EVs, representing a year-over-year growth of 40.8%. During the quarter, we launched 2 large battery electric SUVs, the ONVO L90 and the NIO all-new ES8. Both models have received strong recognition from users from their comprehensive competetiveness to see solid demand. In the meantime, FIREFLY continued to see steady market growth by covering a broader range of price segments and meeting more diverse needs. The NIO, ONVO and FIREFLY brand are able to drive significant growth in deliveries.

In October, the company delivered 40,397 smart EVs, up 92.6% year-over-year, marking 3 consecutive months of record high delivery. For Q4, we expect total deliveries to be in the range of 120,000 to 125,000, a year-over-year increase of 60.1% to 72%, achieving a new quarterly high.

On the financial front, thanks to the ongoing cost optimization. In Q3, the vehicle gross margin improved to 14.7%, and the gross margin of other sales was 7.8%, resulting in an overall gross margin of 13.9%, the highest in nearly 3 years. This reflects the company's strengthened product and service profitability.

Operational efficiency in R&D, sales and general and administration continued to improve. Non-GAAP operating loss was narrowed by 30% quarter-over-quarter. In Q3, the company's operating cash flow and free cash flow both turned positive.

NIO remains committed to a battery electric vehicle road map, featuring chargeable, swappable and upgradable batteries, leveraging the company's full stack R&D capabilities in 12 key pack areas. The 3 brands are able to precisely meet users' needs across multiple market segments and the competitiveness of our NIO products under all 3 brands have been well received.

The NIO brand recently introduced 3 color themes for the ET9 Horizon Edition. The Horizon edition is a special collection reserved for NIO most prominent flagship models. The distinctive design, advanced technology, executive excellence and exclusive services makes the ET9 Horizon edition a standout in the market. The all-new ES8 [indiscernible] flagship SUV was launched and started delivery at NIO Day in September. Leveraging the unrivaled space and driving experiences made possible by all electric technology. The all-new ES8 has remained a top seller in the premium large 3-row SUV segment, surpassing 10,000 deliveries within just 41 days, the fastest were above price above RMB 400,000.

In November, the ES6, another all around SUV in NIO's lineup celebrated its 300,000 unit delivery milestone topping the south chart of China's fabs models priced over RMB 300,000.

Within the ONVO brand, the L90 delivered over 33,000 units in 3 months since its launch in late July, leading the large battery electric SUV segment for 3 consecutive months. The L60 also delivered strong performance, maintaining a top 2 position in the battery electric SUV segment with MSRP above RMB 200,000 during the first 3 quarters. With exceptional products, experiences and word-of-mouth, the ONVO brand increasingly becomes the preferred choice for families.

Since deliver began, FIREFLY has led the high-end small EV market in sales volume, establishing itself as a benchmark in the market. With creative launches of special edition, it continues to strengthen its appeal among users who value quality and individuality. This dynamic small car is already making its way into global markets and will expand into more countries and regions across Europe and Asia.

In Smart Driving, the NIO world model, NWM is the first word model that not only understand and predict the real world, but also operates with a close-loop training system. Actually, the industry trend is increasingly shifting towards a word model road map. Next, we will gradually roll out upgrades on NWM for vehicles equipped with NIO's NX-931 and NVIDIA's [indiscernible] smart driving chip, further enhancing urban and highway [indiscernible] plus, parking and smart safety performance. The upgrades will also enable execution of OpenSat command.

For the ONVO's Smart Driving, the [indiscernible] scheduled for release at year-end will upgrade its model-based end-to-end solution for urban and highway NOA as well as parking, delivering a more seamless driving experience.

Our sales and service network currently includes 172 NIO houses, 395 NIO spaces, 422 ONVO stores as well as 405 service centers and 70 delivery centers. Our global charging and swapping network now operates 3,641 power swap stations, providing users with more than 92 million swaps. Besides, NIO has built over 27,000 power chargers and destination chargers.

On September 17, NIO completed a total of USD 1.16 billion in equity financing on both the U.S. and Hong Kong Stock Exchanges, further strengthening its balance sheet and providing ample resources with long-term commitment to R&D and user services. On November 23, the 2025 new formula student electric China successfully concluded in [indiscernible]. NIO has been supporting this competition since [ 2015 ], helping culture that tens of thousands of young professionals for the industry.

Today also marks the company's 11th anniversary. Over the past 11 years, we have remained committed to in-house R&D in core Smart EV technologies, continued investing in charging and swapping infrastructure, build a multi-brand sales and service system and created a vibrant community for over 900,000 users to share joy and grow together. These advantages have been increasingly recognized by our users. This year, our NIO products across 3 brands have performed strongly in their respective market segments, marking the beginning of a new phase of rapid growth. At the same time, through the cell business unit mechanism, we have comprehensively optimized our organization and enhanced operational efficiency, consistently improving our business results.

[indiscernible] and growing beyond. Looking ahead, we will continue to provide more competitive technology, products and services to deliver better user experience and greater user value. As the company evolves into a user enterprise leading in technology and experience, we aim to shape a sustainable and brighter future with more users.

Thank you for your support. With that, I will now turn the call over to Stanley for Q3's financial details. Over to you, Stanley.

[Stanley Qu, executive]

Thank you, William. Let's now review our key financial results for the third quarter of 2025. Our total revenues reached RMB 21.8 billion increased a 60.7% year-over-year and 14.7% quarter-over-quarter. Vehicle sales were RMB 19.2 billion, up 15% year-over-year and 19% quarter-over-quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by a lower average selling price from product mix changes.

The quarter-over-quarter increase was mainly from higher deliveries. Other sales were RMB 2.6 billion, up 31.2% year-over-year and down 9.8% quarter-over-quarter. The year-over-year growth was driven by increased sales of used cars, technical R&D services and sales of parts, accessories and after-sales vehicle services, while the quarter-over-quarter decrease was mainly due to the decrease in revenues from used cars, technical R&D services, partially offset by the increase in parts, accessories and aftersales vehicle services and provision of Power Solutions.

Looking at margins. Vehicle margin was 14.7% compared with 13.1% in the Q3 last year, and 10.3% last quarter. The year-over-year and quarter-over-quarter increase were mainly due to the decreased material costs per unit primarily driven by our comprehensive cost reduction efforts. Overall gross margin was 13.9% versus 10.7% in Q3 last year at 10% last quarter. The year-over-year increase mainly reflected higher vehicle margin and better profitability in sales of parts, accessories and after sales vehicle services driven by cost reduction and efficiency improvements. The quarter-over-quarter increase was mainly attributable to higher vehicle margin.

Turning to OpEx. R&D expenses were RMB 2.4 billion, decreased 28% year-over-year and 20.5% quarter-over-quarter. The decreases year-over-year and quarter-over-quarter were mainly driven by lower personnel costs in R&D functions due to organizational optimization and decreased design and development costs from different development stages.

SG&A expenses were RMB 4.2 billion, up 1.8% year-over-year and 5.5% quarter-over-quarter. The year-over-year SG&A expenses stayed stable. The quarter-over-quarter increase was mainly driven by the increase in sales and marketing activities associated with new product launches. Loss from operations was RMB 3.5 billion, down 32.8% year-over-year and 28.3% quarter-over-quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted loss from operations was RMB 2.8 billion, representing a decrease of 39.5% year-over-year and 31.3% quarter-over-quarter.

Net loss was RMB 3.5 billion, showing a decrease of 31.2% year-over-year and a decrease of 30.3% quarter-over-quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted net loss was RMB 2.7 billion, representing a decrease of 38% year-over-year and 33.7% quarter-over-quarter. Furthermore, we generated positive operating cash flow and positive free cash flow this quarter, together with the USD 1.16 billion equity offering in September. We ended the quarter with RMB 36.7 billion in total cash and cash equivalents, restricted cash, short-term investments and long-term time deposits, laying a solid foundation for our future growth.

That wraps up our prepared remarks for more information and the details of our unaudited third quarter 2025 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?

[Operator]

[Operator Instructions] Our first question comes from the line of Tim Hsiao from Morgan Stanley.

[Tim Hsiao, analyst]

This is Tim from Morgan Stanley. So I have 2 questions. So the first question is about the breakeven target because we noticed that NIO's updated fourth quarter delivery guidance of 120,000 to 125,000 came in like around 20% lower than our previous target of 150,000. So just wondering that with the evolving [indiscernible] adversely affect the company's breakeven target for fourth quarter. And considering the sub-seasonal demand and positive uncertainty, when could the company achieve previous monthly [indiscernible] of 50,000? That's my first question.

[Bin Li, executive]

[Interpreted] Thank you for the question. Actually, for the company, we still have the confidence in achieving quarterly breaking even in Q4, and this is still our financial target towards the end of the year. But in the meantime, we did see the impact coming from the phaseout and determination of the trading and replacement subsidies in the mid of October. But this is actually the challenge faced by the entire industry. In that case, in Q4 for the entire industry, we may not see the year-end sales spike that we normally expect towards the end of the year. As you are closely tracking the market and all the numbers, probably you have also foresee that potential change towards the end of the year.

And in the meantime, as next year, the purchase tax exemptions on the NIO energy vehicles will be further reduced for the new products like the ES8 with order backlog that will continue towards the next year, car companies, including NIO provide the guarantee for the purchasing tax exemptions to users waiting up for their cars next year. Yet, no car company is going to provide the guarantee for the trading and replacement subsidy. In that case, the overall market demand has been affected because of the cancellation of the trading subsidy, especially for our company, our ONVO L60 and L90 are majorly affected by this cancellation as they are of relatively low-priced segment and are more sensitive to such changes, yet we still have confidence in achieving Q4 breakeven target.

This is mainly because we do see a strong demand for our high-margin products like the all-new ES8, we still have order backlog and also new order intake for that product. So overall speaking, the order intake on the ONVo has been affected because of the cancellation of the trading subsidy, yet the overall impact on the gross profit is limited. In that case, we do have the confidence for the financial targets.

In the meantime, in terms of the vehicle gross margin, in Q3, we have achieved a legal gross margin of 14.7% better than we expected. In the meantime, we are also working with our supply chain partners on the continuous cost reduction and also commercial negotiation efforts towards Q4. With that, we foresee the vehicle gross margin in Q4 to be around 18%. And for the ES8 in Q4, we also expect significant growth in sales and delivery volume with a very lucrative margin of over 20%. Then the overall gross profit for the entire company will be significantly improved from Q3.

In the meantime, we also see good financial performance of our non-car sales business, and we also expect such momentum to continue into Q4. So we see both -- we see improvement both in the sales revenue contributed by the non-eco business as well as the gross margin improvement of that part. With that, the gross profit [indiscernible] vehicle gross profit or the non-vehicle gross profit will also see improvement from Q3 to Q4.

And in terms of the expense and also cost control, since this year, we've been -- we've been taking a series of actions in improving our operational efficiency and also our expenses utilization. And we already see some good results from the Q3 financials. And we will also continue such efforts in Q4 in improving the South -- SG&A expenses as well as the R&D expenses and their efficiency. Especially in Q4, we don't expect any major high-profile marketing or campaigns. In that case, we will be controlling our expenses in Q4 with our SG&A as well as the R&D.

So I'll sum up, our sales volume was affected by the phaseout of the trading and replacement subsidy, yet the gross profit is not majorly affected. In the meantime, we will continue our efforts in improving the efficiency and utilization of our investments and expenses. In that case, we expect also improved business results from Q4 and also have the confidence in achieving the quarterly breakeven target. Thank you, Tim.

[Tim Hsiao, analyst]

My second question is about our volume targets together with the new model schedule because I think back to previous quarters, the management mentioned that we target like 50,000 market run rate in fourth quarter. So if we are not going to achieve that, when can we achieve 50,000 market sales? And considering all the macro uncertainties, would NIO need to consider moving up the launch schedule of the new models to first quarter or earlier to bolster the sales momentum into next year? That's my second question.

[Bin Li, executive]

[Interpreted] Thank you for the question. As also previously mentioned in my remarks, the guidance we provide for Q4 is 120,000 to 125,000 units. In terms of the adjustment on the guidance, as also explained, it's mainly because of the impact on the phase out of the trading and replacement subsidy. With that, we will not be able to see the year-end sales spike driven by the seasonality towards the end of the year, especially this will affect the sales of our cars that have already experienced their new car high stage. But this is also the challenge faced by the entire industry.

Based on our current product lineup and also launch cadence, we do expect that sometime next year, in the first half of next year, we will achieve 50,000 monthly delivery. This is based on the consideration that we will be launching 3 large models next year and also based on the continuous improvement in our sales capacity and also our sales and marketing efficiency. So we do see opportunity of achieving more than 50,000 units per month, somewhere first half of next year. And in the meantime, we will also not just randomly change our new car launch cadence [indiscernible] simply because of a short-term or temporary policy changes will impact. We will still keep our original launch cadence that is to launch 2 new models in Q2 next year and 1 new model Q3 next year.

[Tim Hsiao, analyst]

Looking forward to the first breakeven quarter and more to come.

[Operator]

Your next question comes from Paul Gong with UBS.

[Paul Gong, analyst]

My first question is regarding the 2026 outlook, given there would be 5% of the purchase tax being levied on the EVs, how should we think about the company's preparation for such policy change? Should we compensate for the customers for these amounts and adjust it along the supply chain and internal cost control? Or do you expect the consumers take majority of the [indiscernible]. This is my first question.

[Bin Li, executive]

[Interpreted] Thank you for the question. As next year, the purchasing tax on the new energy vehicles will be halved. Actually, the impact on us is less major in comparison to other new energy vehicle models and also companies as 80%, 90% of our users choose to buy the car while subscribing to the battery. In that case, the price of the battery is excluded from the tax base. In that case, our tax exemption is still more advantages than other companies and also non-swappable models. And in the meantime, for the popular products like the all-new ES8 with a very long waiting time for the deliveries and pick up, we are also the first acquired company to announce the purchasing tax guarantee for our users who have to pick up their cars next year. We have made this purchasing tax guarantee already at the launch of the year.

For other products and models as their waiting time is not as long as ES8, so far, we don't have the guarantee policy for other models. As for the specific measures that we are going to take to -- in the face of the purchasing tax changes next year, while it highly depends on the dynamics of the market, the landscape of the competition and also the practices of other peers. So we will keep flexibility in our measures and also [indiscernible] but currently, we don't have a very specific plan.

And in the meantime, we also see that the entire industry, including the public and users are gradually digesting the phaseout of the purchase impact policies on the new energy vehicles, especially right now, if we look at the smart EV industry in China, it is now less policy-driven as the actual user experience and also the cost advantage of battery electric vehicles are more evident and also becoming more attractive to the users. In the first 10 months of this year, the sales volume growth of the [ bat ] actually increased significantly. This also gave us the confidence in continuing such momentum. So there will be impact from the purchasing tax phase out, but will be very limited.

[Paul Gong, analyst]

My second question is regarding the expense control. And we have already seen quite some cost reduction, especially from the R&D in Q3. And per your guidance, Q4 should see further efficiency improvement. Heading into 2026, should we expect a lower cost structure on the expense side to stay at constant and new normal, i.e., should we expect like low to [indiscernible] for the R&D per quarter and around RMB 4 billion or even lower than RMB 4 billion on the SG&A per quarter?

[Stanley Qu, executive]

[Interpreted] Thank you for the question. As mentioned, in Q3, our R&D expenses is around RMB 2 billion in the non-GAAP basis. And also for Q4 and the next year, we expect our quarterly R&D expenses to be flat, also around RMB 2 billion per quarter. And so far, we don't have any plan to dial back on the R&D expenses. But in the meantime, we will focus more on improving the efficiency of our R&D activities, especially leveraging our sales business unit mechanism. We will make full use of the output of this RMB 2 billion investment every quarter.

Inside the company for the project initiation and approval, we have established the ROI evaluation mechanism. We also have the closed loop with the project review and also improvement. By continuing such efforts, we believe that at RMB 2 billion per quarter in R&D, we will be maintaining our existing product development as well as the key technology development without compromising on the competitiveness of the entire company.

And in terms of the SG&A expenses and it's percentage to the sales revenue, as in Q4, based on the sales volume guidance, we have lowered our volume from 50,000 units per month to -- we have lowered from that base. In that case, originally, our target is to achieve 10% ratio between SG&A and the sales revenue, and now it's around 12%. And in Q4, we will also be keeping that level. But this is against the overall background of achieving the quarterly breaking even in Q4. And in terms of the absolute amount, that's around RMB 4 billion per quarter, as you mentioned. And the next year, we will focus on improving our efficiency in sales and also overall activities. Overall, we believe that 10% between SG&A to the total sales revenue should be a reasonable target for us to achieve.

[Paul Gong, analyst]

Looking forward for more efficient operations going forward.

[Operator]

Your next question comes from Nick Lai with JPMorgan.

[Y.C. Lai, analyst]

This is Nick from JPMorgan. My first question is really on the possibility into 2026 based on William's comment earlier, second quarter and next year, we have 3 new models and [indiscernible] hitting 50,000 units. And Stanley also mentioned that the expense ratio will essentially be contained. So with all this comment, is it fair to say that second quarter 2025 5 breakeven then next year for the full year [indiscernible] next year -- profitability should also be very strong. That's my first question. How should we think about probability in 2026?

[Bin Li, executive]

[Interpreted] Thank you for the question. Actually, for the full year, our business target is to achieve profit for the full year 2026 on a non-GAAP basis. And we do see confidence in achieving this profitability target for next year, non-GAAP. As we basically look at this from both market trend perspective as well as the relative competitiveness of our products and services. Here are some insights into the market and the trends over the past 1 year or so. We will be really looking at the penetration rate of the battery electric vehicle in the premium segment and also more specifically in the large payroll SUV market.

In Q3, the sales volume of the tax increased by 26% quarter-over-quarter while for REEV and [indiscernible], the sales volume only increased by 12% and 7%, well actually decreased by 12% and 7% quarter-over-quarter. And if we look at the entire new energy vehicle market, penetration rate has reached 55% in Q3. And this is majorly powered by the growth in the battery electric vehicle. And in the first or third quarter, the sales volume of BAV has increased by 33%, while for REEV it's only 3%. And more specifically, in October, the BEV sales volume increased by 13%, while for the REEV, it decreased by 13%.

So this is also showing how well received and adopted the BEV model is. And more specifically on the premium segment, priced above RMB 300,000, this is where our new brand and our products are in. For the BEV, it's still a -- it used to be at a relatively low penetration rate, but we do see a trend of improving that penetration. This also gives a huge opportunity. We're enlarging our penetration and market share in that segment. For this year, especially we see the trend where the premium battery electric vehicle products are more and more received by the users. We have already seen the awareness and also the upside with such products. And also this has powered the increase in the penetration rate of this product. For full year last year, the penetration rate of the battery electric vehicle in the premium segment was only 12%. But in Q3 this year, it's already 18%. And in the first 3 quarters, the penetration rate of BEV has increased by 33%, yet for the range extended vehicles, it actually decreased by 10%.

And more specifically, for the large payroll SUV segment, the sales volume of BEV took the first place for the first time in September and it continued such momentum in October. In October, we see the total volume of BEV registration was around 39,000 units. Well for REEV, that was only 24,000 units.

Regarding the sales volume and outlook for next year, as for the [indiscernible] and also the NIO all-new ES8 next year, we will still continue the BEV around these 2 products relatively new to the market, plus we are going to introduce another 3 new large models. So we will be having 5 new large models available to the market next year from the NIO and ONVO brand. And if we look at the mid to large and also the large SUV segments where our new models will be targeting, in Q3, the sales volume of BEV model increased by 146%, well for REEV, it's only 19%. But as mentioned, the overall penetration rate of BEV among the premium large vehicle models, it's still relatively low, which means that we do have huge opportunities and potential in this segment.

So overall speaking, our product launch cadence is in line with the market shift and also the trend, especially considering our large models are also competitive in both products as well as the charging and swapping experience.

And also for these 5 large models, they will also contribute to the major sales volume among all of our products. As they are a high-margin product, they will also contribute more significantly to the vehicle gross margin. With that, next year, we expect the vehicle gross margin to be around 20%. That is the further improvement on top of our existing gross margin for Q3 and also outlook for Q4. But also, this result will be dependent also on the continuous cost optimization efforts together with our supply chain partners.

And in terms of the expenses, as we have rolled out this cell business unit mechanism, we have tightened our control over expenses. We already see some good results, and we will continue such efforts next year in controlling the R&D and also SG&A expenses. And also for our large vehicle models, based on its strong market performance and demand, it already proved that with the right product designation and also with our unique advantages in battery swap, we do can capture a decent market share in that segment. And in the meantime, we also see a positive trend and also huge potential for the battery electric vehicles to take up a higher market share and also penetration among large models and also premium models.

And also, thirdly, we have confidence in achieving the product gross margin of 20% plus our continuous efforts on the cost and expenses control. With all that combined, we think that achieving full year profitable -- achieving full year profitability on a non-GAAP basis where the year of 2026 is a reasonable target for the team.

[Y.C. Lai, analyst]

[indiscernible] exciting outcome for next year. My second question is more about the choice between [indiscernible] media. Can you remind us what is our long-term strategy between insourcing and outsourcing? And what is the important [indiscernible] between these 2 strategies?

[Bin Li, executive]

[Interpreted] Thank you for the question. Our NX9031 is the first smart driving chip made also 5-nanometer process and its [indiscernible] mass production application on the car and also full-set operations were all earlier than the competitiveness of the similar performance in the industry. And we also see how this in-house developed chip is contributing to both performance improvement as well as the cost structure optimization. So for the long term, we will continue our investments and also efforts in the trip-related technologies.

And in the meantime, maybe you have also noticed that recently, we have announced a partnership where we are going to share our trip solution and the technologies to more industry players, both from the automotive industry as well as from the nonautomotive industry as we do see a good potential of applying this high computing power within chip on different types of devices, for example, on robots. So we will work with our tax customers together to explore more use cases and also application scenarios of our chip.

[Operator]

Your next question comes from Bin Wang from Deutsche Bank.

[Bin Wang, analyst]

My first question is about the margin in the third quarter. It clearly is a big margin dropped by 4.4% by just explain because of cost [indiscernible] just enough. Is that because of the mix because LRIT has been volume contribution more than 20,000 units. Can you break down about the margin driver? How much came from the margin from the overall LID, how much from the cost reduction -- really construction was the key item you actually going to cost the job in the 3 quarter?

[Stanley Qu, executive]

[Interpreted] Thank you for the question. As you've mentioned, our vehicle gross margin result in Q3 and the improvement from the previous quarter is majorly driven by 2 factors: The first is the cost reduction contributed by the supply chain, driven by the increase in our sales volume. And the second factor is the south and the delivery of the L90, which is a high-margin product that we have started to deliver from Q3 in comparison to Q2, we have delivered more than 20,000 L90 contributing better margin performance than the L60 in the previous quarters. These are 2 major drivers of the gross margin improvement in Q3. As for the specific breakdowns, I will also share more information offline with you.

But here, I can share with you some of the legal margin performance model by model. For the NIO ES8, as mentioned by William, is the vehicle margin is 20%. Of course, we didn't start the delivery of ES8 onto late Q3, so its actual contribution in the volume side is relatively small. And for the ET5, ET5T the vehicle gross margin is between 15% to 20%. And for ES6 and EC6, the vehicle gross margin is over 20% and even reaching 25% as these are already products being in the market for a while, we have already were of the new car bus of these models. And for the L90s vehicle margin is around 15% to 20%.

So while speaking for the new models plus the ONVO L90 do have a pretty good vehicle margin performance.

[Bin Wang, analyst]

My second question about your related to the joint venture with [indiscernible], this may be major shareholder with 36.4% stake in the company. So my question is, number one, why are you choosing partners, [indiscernible] from Chongqing. Why it's not somebody else? Secondly, what's the first model about this joint venture? Is it just a sales company. And actually, you really maybe [indiscernible] mentioned to make a chip balances. Meanwhile, do you actually get any license fee in already from this joint venture because this seems to be [indiscernible] chips?

[Bin Li, executive]

[Interpreted] Well, thank you for the question. Yes, Sun Media has covered the establishment of this chip joint venture. And also, we are leveraging our partners of this joint venture to sell our chip and also our IC design capabilities to other clients and also potential users. But this is not an exclusive partnership. We still have the possibility and also the opportunities to sell our chip solution and product to other partners and companies from our side. So that's one part of the way to sell that solution. We can also leverage our partner's resources to provide our chip solution to other car companies or other clients and they will be acting as a Tier 1, providing such a solution.

In the meantime, as mentioned, we also see opportunities of applying such chip in the non-car -- nonautomotive industry. So that is also a pretty common practice for the car companies to share their technologies across different industries. And for our partners, they do have mature experience and also skills in the industry -- in the chip design industry. They also have their own client and also network connections. And also they have some chip products that can be complemented to our chip across different scenarios. So while speaking, we believe that this is a win-win partnership.

[Operator]

Your next question comes from Jeff with Citi.

[Ming Chung, analyst]

This is Jeff from Citi. My first question is on the 4Q ASP. So it looked like the RMB 34 billion revenue guidance should match with vehicle ASP up 12% Q-on-Q at RMB 246,000. So if the GP margin reached 18%, that's around RMB 6 billion gross profit, right? So this is my first question. And my second question is the first quarter because we recognize the 4Q guidance, such as revenue up 56% Q-on-Q, right? And the GP margin reached 18%. But having said that, entering into first quarter next year, our volume is not going to drop back to the third quarter level, right? And secondly, look like our high-margin products like Q-on-Q volume into the first quarter is going to be stable. So therefore, the product mix should further improve into 1Q on a Q-on-Q basis.

So my second question is would the first quarter vehicle margin also stayed closer to the 18% level because the higher-margin products contribute more to the mix?

[Stanley Qu, executive]

[Interpreted] Thank you for the question. Regarding the average selling price, it will increase in Q4. This is mainly driven by the sale of the high-margin products of ES8. As for the full year, our volume guidance for ES8 is around 40,000 units, and most of these sales will be happening in Q4. So it is also contributing to the improvement of the average selling price from Q3 to Q4.

And regarding your second question on the gross margin outlook for Q1 next year. Well normally, Q1 is the low season of the automotive industry. So overall speaking, the source volume in Q1 will be -- won't be as good or as high as we normally expect for Q3 and Q4 in the previous years.

As also mentioned, in Q4 this year, we may not see the common sales spikes fueled by the seasonality. In that case, even if we are going to encounter the low season Q1 next year, the actual impact was reduced or decreased from Q4 this year to Q1 next year won't be that significant in comparison to the previous years.

Now to mention that we also have the ES8 order backlog that were lost on to next year. This will also help to offset the seasonality impact in Q1 next year. So overall speaking, our operations and also volume forecast for Q1 next year will not be as good as in Q4 this year, but will also not be as low as in Q1 this year. So overall speaking, the vehicle gross margin falls into the same trend. It will be lower than the margin outlook we have for Q4 this year, but will be better than Q1 last year.

[Operator]

Your next question comes from Ming-Hsun Lee with Bank of America.

[Ming-Hsun Lee, analyst]

My first question is regarding your overseas plan because I think in the past few years, you have built several sales channel in Europe. And could you give us more of your strategy for overseas expansion for next few years. That's my first question.

[Bin Li, executive]

[Interpreted] Thank you for the question. We entered into Europe in 2021 and from '21 to '24 in the past several years, we've been doing direct to customers or direct to users, the direct selling model for the European market. Yet in the meantime, with all the external factors, such as the tariffs in EU, we also started to realize that for a broader market entrance, we do need to rely on and leverage more on the partner support and resources. That's why starting this year, we have started to look for local partners for our market entry. Right now, we already have identified high-quality partners in more than 10 countries and regions. And the FIREFLY will be the first brand where we introduced to the overseas markets, leveraging our partners' resources and the network. The product will become available not only in Europe, Asia, but also in Middle East and also South America.

So overall speaking, for the global market expansion, we are switching our business model from the direct selling business model to a more partnership base and also local partners supported business model. And also for the FIREFLY and its products, it's actually a very good product suitable for broader markets and also its European version and the right-hand drive version already developed, ready for the global market entry. So we do have confidence in the global expansion of the FIREFLY product. And in the meantime, we are also developing the other products for the global market. It is also a brand with a reasonable price range and product lineup for the global market expansion.

As for the NIO brand, it targets the premium segment, it does take patience and time to establish brand awareness on the new product. In that case, we are also more patient and also more long term for the global market expansion of the NIO brand. So overall speaking, in China, we started with the NIO brand, the premium one and then we have the ONVO brand and the FIREFLY. But for the global market expansion, we will take the opposite way where we will start with FIREFLY, and then when ONVO has the product ready for the global markets, we will then push out ONVO and then NIO.

[Ming-Hsun Lee, analyst]

Thank you, William. My second question is regarding the expansion of more mass market opportunity. So since the ONVO is very successful in L90. And also recently, your L60 volume sales also continue to grow. So in the future, do you expect to launch more products under the ONVO brand and to have more business opportunity for the segment at the RMB 200,000 or even below?

[Bin Li, executive]

[Interpreted] Thank you for the question. For the ONVO brand, it is defined as a family-oriented brand for the mass market. So just like Toyota and the Volkswagen, for the long term, we do need to create a wide and broad product bandwidth to cater to more needs and also to cover more press and market segments. So for the long term, for the ONVO brand, our price bandwidth will be ranging from RMB 100,000 to RMB 300,000. Within that range, we are going to offer more diverse products and also options for our users to choose from. We started with L60 priced around RMB 200,000. And for the L90, the fully loaded one has a price point of around or close to RMB 300,000. And the next year for the L80, it will also be between RMB 200,000 to RMB 300,000. So that is already a press segment captured by the existing 3 projects.

And in the meantime, we are also developing a new product platform where we are targeting the price range below RMB 200,000. We believe that with this diversified product and price lineup plus more mature power swap network, we are able to achieve a reasonable market share in the price range from RMB 100,000 to RMB 300,000. This is also the single largest priced segment and the market in China's passenger vehicle market with a total volume of RMB 15 million. In such a large market, there is no reason for us to not launch enough products to capture a sufficient market share.

[Operator]

Your next question comes from Jing Chang with CICC.

[Jing Chang, analyst]

I have only one question -- a follow-up question regards to the R&D expense. We have already seen our R&D expense in third quarter further decreased a lot to our previously guided level. So -- but the industry has increased investment in intelligence and also AI-related other area, how do we allocate our limited R&D expense and how we balance the sharper R&D efficiency and also long-term R&D goals?

[Bin Li, executive]

[Interpreted] Thank you for the question. Actually, this year, our major focus in the R&D activities is to improve the efficiency and also to identify the priority of different R&D activities and the projects. In that regard, the CBU mechanism has played a very important role in helping to make full use of the R&D investments and expenses. And in the meantime, we will also make sure that we will not lose our long-term competitiveness as that is a baseline that we will not cross.

So with the CBU, we actually are pleased to see that even if we are dialing back on the R&D expenses in the recent quarters, yet we still maintained the R&D capabilities and competitiveness in the full-stack capabilities for the smart EV. So we are also confident to control -- to continue that competitiveness. And also in the past several years, we've made major investments in developing the fundamental technologies for the core EV products, including our chips, operating systems, intelligent chassis and also 900 volts high-voltage architecture. As the foundation is already laid for the future products and the technology platforms, the follow-up iterations won't be as costly as developing the foundation and also the fundamental technology as the future iterations will also get more efficient in utilizing limited R&D resources.

And also regarding the AI technology and the applications like the Smart Driving and also our AI companion, Know Me, as well as the internal management and efficiency tools, we will continue our R&D intensity and also efforts, but we'll achieve that in a more efficient way. And in terms of using algorithms and the data, we actually have identified some good practices and approaches that can be more efficient than simply putting up investment or resources for the sake of achieving a high computing power or data performance. So we have identified some approaches with higher return on the investment. And actually, in the AI industry, the success of [indiscernible] has also proven that you don't need to make costly investments into developing a good large language model performance. So it's the same practice for us. Not to mention that we can also leverage our collective artificial intelligence equipped on all the vehicles and also our data [indiscernible] with that to achieve the same level of computing performance, we actually don't need to use that much computing power as our competitors or other peers are doing.

So overall speaking, in terms of the R&D, we have being putting more focus on the return on investment evaluation as well as doing a better priority for our R&D activities.

[Operator]

Your next question comes from the line of Yuqian Ding with HSBC.

[Yuqian Ding, analyst]

I've got 2 questions. First one is, could you share the cost benefit when we hit the volume threshold, the current run rate is RMB 0.5 million now, and it's only going to get higher next year. What benefit can we get, let's say, battery and other critical components that have high weight in the BOM structure?

[Stanley Qu, executive]

[Interpreted] Thank you for the question. As mentioned, when the sales volume reached a certain level of scale, we will actually see how the economy of scale is contributing to the improvement in the financial performance, and it's mainly contributed where it's mainly from 2 perspectives. The first is regarding stronger bargaining power along the supply chain. This can also help improve the vehicle cost structure as you already see in our Q3 and Q4 vehicle margin guidance. And for the next year, we don't have a clear picture regarding how much it will be contributed by the economy of scale from the supply side. Yet as mentioned by William, our gross margin target for next year is 20%. That will actually partially be driven by the -- by the economy of scale on the supply side.

And the second is regarding the improvement in the manufacturing efficiency and also cost optimization driven by the manufacturing. As we improve our sales volumes, the overall amortized manufacturing cost per unit will be gradually optimized. That will also contribute to the improvement in the cost structure of our products.

[Yuqian Ding, analyst]

Thank you, Stanley. The second question is regarding next year's new model, could you help us to put in context the potential higher scale and also the mix impact? We talked about the bigger vehicle has a better margin. But we also talked about ONVO L90 to 15% to 20%. So L80 will be below 90% in terms of the pricing, presumably, Will there be dilution or joint ONVO scale outweigh that?

[Stanley Qu, executive]

[Interpreted] Thank you for the question. As mentioned, the 3 new large SUV models that we're going to introduce next year, they are all positioned at the higher end of the price spectrum of their respective segment. We haven't finalized the prices for these new models yet. Yes, we already expect more significant margin contribution by these 3 models. Not to mention that these 3 large models, they are further synergized with the current ES8 and L90's from the cost structure. So this year and the next year for the cost structure -- for the cost optimization and cost saving opportunities that we've identified on the ES8 and L90 can also be carried over to this 3 new models.

So with 5 large models combined, we expect them to contribute to good product -- good product performance as well as on the margin levels over seeking achieving 20% of equal margin.

[Operator]

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

[Rui Chen, executive]

[Interpreted] Thank you again for joining us today. If you have any further questions, please feel free to contact our Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your line. Thank you.