Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated, Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to your host, Mr. Rui Chen, Director of Investor Relations of the Company. Please go ahead, Rui. Thank you.

Rui Chen - Director of Investor Relations

Thank you, Operator. Good evening, and good morning, everyone. Welcome to NIO's Second Quarter 2020 Earnings Conference Call. The Company's financial and operating results were published in the press release earlier today and are posted at the Company's IR website.

On today's call, we have Mr. William Li, Founder, Chairman of the Board and CEO; Mr. Steven Feng, CFO; Mr. Stanley Qu, VP of Finance and Mr. Jade Wei, AVP of Investor Relations. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements 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 US Securities and Exchange Commission.

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

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. Hello, everyone. Thank you for joining NIO's 2020 Q2 earnings call.

[Foreign Speech]. In the second quarter of 2020, NIO achieved a record quarterly deliveries of over 10,000 units, and delivered an aggregate of 10,331 ES8 and ES6, representing a strong growth of 190.8% year-over-year and 169.2% quarter-over-quarter. In July 2020, NIO delivered 3,533 units, marking the second highest monthly delivery results. The cumulative deliveries in the first seven months of 2020 increased by 111.3% over the same period of 2019. Starting from October 2019, ES6 has ranked as the top selling SUV across all EV sectors in China. For the first half of this year, ES8 has also achieved a number one in sales among mid to large size luxury electric SUVs priced above RMB400,000 in China.

[Foreign Speech]. In the third quarter, we are confident to achieve a new quarterly record of 11,000 to 11,500 deliveries.

[Foreign Speech]. As for the gross margin, with the strong momentum of quarterly deliveries, rise of average selling price, reduction of a battery pack and other BOM costs, and improvement of manufacturing efficiency, our gross margin has substantially increased in the second quarter. The vehicle margin and the gross margin reached 9.7% and 8.4% respectively, far above our previous guidance of 5% and 3%.

[Foreign Speech]. We will continue to improve our gross margin, and expect our vehicle margin and the gross margin to both exceed 10% in the second half of this year.

[Foreign Speech]. With the gross margin turning positive, and the operational efficiency improving comprehensively across the Company, the operating loss of the second quarter has further narrowed to RMB1.16 billion, representing a decrease of 64% year-over-year and a decrease of 26.1% quarter-over-quarter. The significant increase in deliveries, and the direct-to-sales model and the great support from supply chain partners have enabled us to achieve positive operating cash flow for the first time in our history.

[Foreign Speech]. In the second quarter of the 2020 - the second quarter of 2020 is a milestone quarter for us. NIO has made significant breakthroughs in sales, gross margin, operational efficiency and cash flow. After our enduring efforts in the past year, we have found our pace to implement efficient management, and solid execution on near-term operational objectives, and meanwhile, to make a decisive investments in R&D and services for our long-term competitive edges.

[Foreign Speech]. Next, I would like to share with you our recent key priorities.

[Foreign Speech]. With respect to R&D, as the Company's overall situation improves, we have accelerated the new product development and will increase our investment in the autonomous driving technology, so we can develop industry leading technologies to maintain the long-term competitiveness of our products.

[Foreign Speech]. In terms of the projects, the EC6, our smart electric coupe SUV was officially launched on July 24th, with a pre-subsidy price starting from RMB368,000. It has been very well received by the users and the market, and presented a stronger order performance above our expectations. The mass production of EC6 is proceeding well according to plan and we will commence deliveries in late September.

[Foreign Speech]. As for production capacity, the manufacturing team is going to increase the production rate of the Hefei plant from 15 jobs per hour to 20 jobs per hour, while working together with supply chain partners to improve their capacity at the same time. By late August, or early September, the overall supply chain capacity on a single shift is expected to reach 4,500 units to 5,000 units per month.

[Foreign Speech]. Regarding sales and service network, we have opened 22 NIO Houses and 119 NIO Spaces in 89 cities, and 142 battery swap stations in 63 cities in China. Moving forward, we will further expand the coverage of the battery swap stations and NIO Spaces to better serve our users.

[Foreign Speech]. In the meantime, we have also made profound progress with the innovative business model of Battery-as-a-Service, namely decoupling the battery from the vehicle. We have completed the necessary product communication and the certification required to be qualified to sell vehicles and batteries separately. The process of the first vehicle under the BAAS model has been validated in insurance purchase, long application and the license plate registration. This is a breakthrough moment in our technology and business innovation.

Currently, we are still working on the final preparation for the official offering of our BAAS solution, which will be released publicly in the third quarter along with the increasing recognition from the users, government and the industries. We believe the advantages of our chargeable, swapable, and upgradable products and the service assistance will become more self-evident.

[Foreign Speech]. As we deliver more and more vehicles, our user base is growing while the user community is maturing. On August 8th, 2020, the NIO Day 2020 host city bidding campaigns came to a conclusion. Over 40,000 new users actively participated in the voting. After a fierce, but friendly competition, Chengdu stood out among ten cities and won the bid to host the NIO Day 2020.

[Foreign Speech]. Every little bit of our progress would not be achieved without the trust and the support of our users. The bidding campaign of NIO Day 2020 has once again demonstrated the vibrancy and the enthusiasm of the NIO community.

[Foreign Speech]. I would like to thank our users and everyone for their support. With that, I will now turn the call over to Steven to provide you the financial details for the quarter. Steven, please go ahead.

Wei Feng - Chief Financial Officer

Okay. Thank you, William. I will now go over our key financial results, for the second quarter of 2020. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the second quarter were RMB3.72 billion or $526.4 million representing an increase of 146.5% year-over-year, an increase of 171.1% quarter-over-quarter.

Our total revenues are made of two parts: Vehicle sales, and Other sales. Vehicle sales in the second quarter were RMB3.49 billion or $493.4 million, accounting for 94% of total revenues in this quarter. It represented an increase of 146.5% year-over-year, an increase of 177.6% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to the increase of vehicle deliveries of the ES6 which began its first deliveries in late June 2019. Other sales in the second quarter were RMB232.8 million or $33 million, representing an increase of 147.7% year-over-year, an increase of 100% quarter-over-quarter.

The increase in other sales year-over-year was really attributed to increased revenues derived from the service package and energy package subscribed, home chargers installed, and accessories sold, which was in line with increased volume in the second quarter of 2020. Cost of sales in the second quarter was RMB3.41 billion or $482.1 million, representing an increase of 69.2% year-over-year, an increase of 121.2% quarter-over-quarter.

The increase in cost sales year-over-year was mainly driven by the increase of delivered volume in the second quarter of 2020. Gross profit in the second quarter of 2020 was $313.1 million or $44.3 million representing an increase of 162.1% year-over-year an increase of 286.9% quarter-over-quarter.

The increase in gross profit year-over-year was mainly contributed by increased vehicle sales and higher gross margin in the second quarter of 2020. Gross margin in - gross margin in second quarter of 2020 was 8.4% compared with negative 33.4% in the same quarter of 2019, and negative 12.2% in the first quarter of 2020.

The increase of gross margin year-over-year was mainly driven by the increase of vehicle margin in the second quarter of 2020. More specifically, Vehicle Margin in the second quarter of 2020 was 9.7% compared with negative 24.1% in the same quarter of 2019 and negative 7.4% in the first quarter of 2020.

The increase of vehicle margin was mainly driven by the decrease in purchase price of certain materials and lower unit manufacturing cost attributed from increased production volume in the second quarter of 2020. Besides above, the increase of vehicle margin year-over-year was also attributable to the impact of one-off cost in relation to the Company's voluntary battery recall in the second quarter of 2019.

R&D expenses in the second quarter were RMB545.2 million or $77.2 million, representing a decrease of 58.1% year-over-year, an increase of 4.4% quarter-over-quarter. The decrease in R&D expenses year-over-year was primarily attributable to the incurrence of expenses relating to rigorous testing activities of ES6 in the second quarter of 2019 before its mass production.

SG&A expenses in the second quarter were RMB936.8 million, or $132.6 million representing which is a decrease of 34.1% year-over-year, an increase of 10.4% quarter-over-quarter. The decrease in SG&A expenses over year-over-year was primarily driven by the Company's overall cost saving efforts and the improved operating efficiency in marketing and other supporting functions.

Loss from operations in the second quarter was RMB1.16 billion or $164.2 million, representing a decrease of 64% year-over-year and a decrease of 26.1% quarter-over-quarter.

Share-based compensation expenses in the second quarter were RMB45.3 million or $6.4 million representing a decrease of 50.9% year-over-year, an increase of 39.8% quarter-over-quarter. The decrease in share-based compensation expenses year-over-year was primarily due to less options granted driven by the decline in the number of employees, and impact of part of the share-based compensation expenses being recognized by using the accelerated method, under which the expenses decreased gradually over the vesting period.

Net loss in the second quarter was RMB1.18 billion or $166.5 million representing a decrease of 64.2% year-over-year and a decrease [Technical Issues]. Net loss attributable to NIO's ordinary shareholders in the second quarter was RMB1.21 billion or $171 million, representing a decrease of 63.6% year-over-year, and a decrease of 29.9% quarter-over-quarter.

Basic and diluted net loss per ADS in the second quarter were both RMB1.15 or $0.16 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB1.08 or $0.15 per ADS in second quarter.

Our balance of cash and cash equivalents, restricted cash, and short-term investment was RMB11.17 billion or $1.58 billion as of June 30th, 2020. And now, for our business outlook. As William mentioned, for the third quarter of 2020, the Company expects deliveries to be between 11,000 vehicles to 11,500 vehicles representing an increase of approximately 129.2% to 139.6% from the same quarter of 2019, an increase of approximately 6.5% to 11.3% from the second quarter of 2020.

The Company also expects the total revenue of the third quarter 2020 to be between RMB4.05 billion to RMB4.21 billion or between $572.9 million to $596.2 million. This would represent an increase of approximately 120.4% to 129.3% from the same quarter of 2019, an increase of approximately 8.8% to 13.3% from the second quarter of 2020.

This business outlook reflects the Company's current and preliminary view on the business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Question & Answers

Operator

Certainly. Ladies and gentlemen - [Speech Overlap] Yes, sir. Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Thank you. We have the first question from the line of Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao - Morgan Stanley - Analyst

Hi, William, Steven, Jade and Rui. Congratulations on the strong results and thanks for taking my questions. So two quick questions. The first one regarding second quarter's gross margin, because it came in as a strong beat versus previous guidance. I think, in addition to the strong scale, because you just mentioned it was attributable to the high average revenue per vehicle. So could we have a rough idea what the gross margin difference between like ES8 and ES6 at the moment? And could we expect ES6 margin to reach similar level as ES8, with additional contribution from EC6 later this year?

And my second question is about R&D expenses, because if you look at the state in the first half, I think the R&D expenses are under great control with around like a $500 million to $600 million per quarter despite the model launch. So would this be the normalized level because as William mentioned about investment in new vehicle development, and also the autonomous driving technology. So could we have the rough - also have the rough breakdowns about how many percentage of the R&D is now for the vehicle development and the rest, like autonomous driving and other technology? Thank you.

Stanley Qu - Vice President of finance

Okay. This is Stanley. For the first question about the gross margin of ES8 and ES6, generally the gross margin of ES8 is higher than ES6, and we are trying to improve both the two models in the future, but we won't breakdown details of margins of each models, okay?

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. I would like to answer the second question regarding the R&D investment. Right now, we would like to control our R&D investment within RMB3 billion every year including the labor cost, the suppliers, the EDD [Phonetic] cost. In terms of the breakdown, of course the percentage we invested for the vehicle related R&D is higher, but just like I mentioned, we will increase our investment on the autonomous driving technology.

Right now, we have already got a team of about 200 people focusing on the autonomous driving technology development which account a fixed part of the R&D cost. For the next generation autonomous driving technology, we are going to increase our investment. But at a normal pace, just like you mentioned, it should be around $500 million to $600 million for one quarter. But for some quarter because of our product development of cadence we managed to increase this investment.

Stanley Qu - Vice President of finance

Thank you. Got it. Thank you very much.

Operator

Thank you. We have our next question from the line of Bin Wang from Credit Suisse. Please go ahead.

Bin Wang - Credit Suisse - Analyst

[Foreign Speech] Actually, I've got three questions about autonomous. Question number one about launch timing of their two features. One is the NGP, the Navigation Guided Pilots and second about their standard [Phonetic] features when will it be launched, because there has been as showed in the news apps where it maybe come up this year. So I just wanted to know the exact timing.

And secondly, vehicle penetration because we want to get such a feature to pay additional RMB39,000 as a package. So what's the penetration right now? And what's the ratio has been during in the past few months or quarters? And the third one is that, for the next generation autonomous, which is level four content media you partnered with the Mobileye on the EyeQ5 on the chips. So what's the timing for the launch of the level four? Thank you.

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. Thanks for your question. Regarding the Navigate on Pilot feature, we're now doing rigorous tests on this feature and we plan to release this within 2020. However, regarding the NIO assembling feature because of the hardware constraints, our feature is not as competitive as Tesla's assembling [Phonetic] because our feature can only support getting out and in the parking space. So I don't want to mislead the users, but together with the HD map, we believe our Navigate on Pilot can achieve a very good performance.

[Foreign Speech]. Regarding the second question for the take rates of the Navigate on Pilot, we have the Founder's Edition which accounted for around 10,000 units. This Founder's Edition has the NOP as a standard feature. So this is quite helpful with the take rate of our speaking [Phonetic]. But normally speaking, the take rate for the NOP right now is around - right now the take rate of the NIO Pilot is around 25%. This year, we have released a selected NIO Pilot, which is priced around RMB10,000 which has enjoyed a much better take rate.

[Foreign Speech]. For the next generation autonomous driving technology or our NIO Technology Platform 2.0, right now, we are speeding up our development pace for this new technology platform. But it's still too early to share any specific information regarding the technology roadmap. All I can say right now is we set very high bar for ourselves for this next generation platform and we have been working on the autonomous driving technology development. In 2018, when we release the ES8, we are the first car to be equipped with the Mobileeye EyeQ4 chipsets.

Other competitors, they launched the car with the EyeQ4 chipset around one year later. So it shows that we have much more experience in terms of the mass production and autonomous driving. Our experience in this regard has been tested and verified. So for the next generation platform, we would like to set a much higher standard for ourselves and we will keep you guys updated at a timely manner.

[Foreign Speech]. But here I would like to emphasize that we don't actually use the Level 3 or Level 4 to define our AV [Phonetic] technologies. We use two different criteria from the users' interest to perspective. The first one is, we focus on how much time we can free up for our users, and the second criteria is how many accidents we can reduce compared with the human driver. We believe that these two criteria are more important than the definition of a Level 3 and Level 4. Thank you for the question.

Bin Wang - Credit Suisse - Analyst

[Foreign Speech]. Can I have another follow-up?

Bin Li - Founder, Chairman and Chief Executive Officer

Yeah, please.

Bin Wang - Credit Suisse - Analyst

Okay, thank you. Actually, I saw on the website that [Indecipherable] NIO may go to Germany later this year. So I just want to know your global expansion [Phonetic] plan [Indecipherable] to China. What is your future plan for the off the sea expansion? Thank you. [Foreign Speech]. From day one, NIO is different from other companies. So we are a global start up. So we have kept our normal operation in the San Jose and German office even despite the most difficult times in last year. Even with the COVID-19, we still operate normally in the overseas office. So we are now doing the preliminary research regarding the international market entry, including the product preparation, team building, and also the market entry planning. But this year, I believe everyone understand is not a very good year for us to enter the international market. We understand many overseas medias pay great attention to our product. After the renowned European and the US media tested our vehicle, they also speak very highly of our vehicle. So we would like to do this step-by-step and build-up our capabilities to enter the global market. So I would like to ask for more patience. Thank you so much, and congratulation for the great result. Thank you.

Bin Li - Founder, Chairman and Chief Executive Officer

Thank you. [Foreign Speech]

Operator

Thank you. We have our next question from the line of Lei Wang from CICC. Please go ahead.

Lei Wang - CICC - Analyst

Thank you. Good evening, William and Steven. This is Wang Lei speaking from CICC. Congratulations on the positive cash flow and better than expected gross margin. That's for sure a good move. I have two questions on the financials. So the first question goes with the gross margin, I know William just guided a QVM [Phonetic] above 10% by end of this year. But considering, we just have hit a 9% - a 9.7% vehicle gross margins by second quarter already. Can we have an updated gross margin target, if you have any? That's the first question.

Wei Feng - Chief Financial Officer

Okay. Hi, Wang Lei. I would like to answer the first question. Generally, in the Q3 and Q4 we expect the vehicle average selling price remains relatively stable, and for the battery pack cost, we foresee there were still some room for us to further reduce its cost. Yeah, and together with other cost savings for the BOM, I think generally the 10% - over 10% target for vehicle margin and the overall margin can be achieved. But as you mentioned, whether we want to further like increase our target for the gross margin, I don't think we want to do this at this moment. I think we still keep like the guidance of over double-digits in the second half. Yeah.

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. Of course, we understand that there are still room for improvement in terms of the gross margin and the many other aspects. But, we would like to move forward according to our own pace. Just like the last quarter, we would like to keep it a more conservative attitude regarding those targets.

Lei Wang - CICC - Analyst

All right, thanks. Thanks, William, thanks Jade. So the second question goes with the operating cash flow. I think that's primarily driven by optimized working capital, and I wanted to see if you or Steven could kindly provide a breakdown?

Stanley Qu - Vice President of finance

Hi, Lei. This is Stanley. Regarding the positive cash flow. Yeah. Generally, there are the following reasons which drive the positive cash flow. The first is operating loss, we control that at relatively lower level. And the second, yeah, as you mentioned, we renegotiate the credit term and also the payment methods with our suppliers.

And, for example, we ask the supplier to extend the credit term from 60 days to 90 days, and also ask them to accept the bank [Phonetic] notes instead of cash for the payment of the purchase. So the third one as William mentioned, you know the direct sales model and also the leading - make us to receive cash collections earlier than the payment to the suppliers. So generally, all these reasons drive us to achieve the positive cash flow in Q2, yeah.

Lei Wang - CICC - Analyst

Yeah, thanks. Thanks, Stanley. I think the payment terms is a very positive signal as the supplier already has some confidence on you. That's pretty good for you. So, the third question and the last question, William mentioned the monthly production capacity of between 4,500 units to 5,000 units and as Steven just guided it, roughly 11,000 units car deliveries in next quarter and why do we see a gap between the production capacity and the sales outlook?

Wei Feng - Chief Financial Officer

Hi. This is Steven. First, we increased our product capacity at end of August, and you know, for any plant which tries to increase its product capacity, there is a ramp-up period, okay. So our production capacity in July and August, it's still below 4,000 units, and that is a constraint for our delivery in Q3. And we - then why do we increase our product capacity to 4,500 to 5,000? That's because, that's the preparation for our Q4 delivery.

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. We want to improve the production capacity. It's because of the strong demand in the market. Many of my friends have asked me to check whether it's possible to have their ES8 delivered early. So there is a very big ES8 order backlog right now. As I mentioned, the ES6 delivery will commence at late September this year. So we also need some time to ramp up the production of the EC6 in the front. Before we start the delivery of the EC6, we will start to accumulate orders for the EC6.

So it means that in the fourth quarter this year, we're going to witness a significant pressure on our delivery and production. That's why we would like to increase of our production capacity at the end of August. Then we can be fully prepared for the EC6 ramp up and the Q4 delivery.

Lei Wang - CICC - Analyst

All right, thanks, William, Stanley, Steven. That's all my questions. Great [Phonetic] financial results. Take care. Thank you.

Wei Feng - Chief Financial Officer

Thank you.

Operator

Thank you. We have our next question from the line of Ming Hsun Lee from BOFA. Please go ahead.

Ming Hsun Lee - Bank of America Merill Lynch - Analyst

Thank you, William and Steven and the management. Congrats for the good results. Two questions. And so the first questions is that, I think the market seems - does not understand too much on the battery-as-a-service. So, probably, I think probably you can take this opportunity to give a more explanation on the business. So first off, I would like, I want to know that right now, how much of a battery assets on your book? And once you set up a new factory management - asset management company, around how much assets you can reduce down from your balance sheet. This can ease your pressure on the balance sheet going forward.

And also the second question is that once the BAAS business model is confirmed then I believe you can start to open auto finance program for both the vehicle as well as the factory. So I think that the down payment of consumers will be much lower compared to the current status. So how much more new demand do you think that you can create through the battery as a service?

So that's my first question. Thank you management team.

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. Thanks for your questions. Battery-as-a-service is a very innovative business model, and it's quite difficult to validate this product, just like I mentioned in my previous prepared remarks. So we have now got the government approval, and the first vehicle without the battery has already finished the validation process. Regarding the insurance purchase, loan application and the license plate registration, basically it means that you buy the car without the battery, and it means that when you pay for the car, you do not need to pay the cost of the battery. Previously, we were trying to launch similar plans, but because of the restrictions with the government policy, we didn't fully implement the real battery-as-a-service business model. But now, since we have already got the support from the government and the related policies, we believe it's the right time for us to do this.

[Foreign Speech]. I would like to explain a little bit about the difference. Right now, if the user wants to do the financing for the battery, then it means that at the beginning of the vehicle purchase, they can pay less money that is around RMB100,000 less. Then they will have the monthly payment, but for that monthly payment, they cannot get the loan. So it means that we can use the ES6, as an example. The price is around RMB358,000 then it means that the users can pay RMB258,000 at the beginning, but for this they cannot get the loan from the bank because of the government policy restrictions.

But if we can go with the BaaS solution, then it means that with the new product homologation policy and the certification policy, the users can have less payments at the beginning, but they can still enjoy the loan for the monthly payment, which just like you mentioned should be able to lower the down payment as well as the monthly payment for the users.

We believe that this is not going to affect our gross margin or probably it is even going to help us with the gross margin. But with this solution, we should be able to help the users to lower their down payment and the monthly payment, and we believe that this is going to be a very good boost to our vehicle sales.

[Foreign Speech]. Just like I mentioned before, we will release the detail in the third quarter. We are now at the final commercial preparation stage. A very important task for us is to prepare the set up of the Battery Asset Management Company. We are one party out of this endeavor, but we are not the main stakeholders. So it means it's not going to affect our balance sheet. But we would like to set up this Company around August.

This asset company is going to own the battery assets and then lease it to the users. We believe this is going to be a very innovative move for the whole industry and attract more parties to join this asset management Company and build a virtuous cycle.

Ming Hsun Lee - Bank of America Merill Lynch - Analyst

Thank you, William. That's my question. Thank you.

Bin Li - Founder, Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Paul Gong from UBS. Please go ahead.

Paul Gong - UBS - Analyst

Hi, thanks. Thanks for taking my question. I have two questions. I remember at the early stage of NIO, it has planned the ET7 as a sedan, as well as the NIO plants [Phonetic], but they get either delayed or canceled last year. But nowadays, since you have received a lot of refinancing and have a much stronger balance sheet than last year, will you consider to build the second plant by yourself? And will you consider launch the ET7 second time or would the first model be a different model, kind of give us a bit color on that next model coming in the due date [Phonetic] later this year?

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech]. Thanks for your question. We have kept our cadence of launching one new product every year. After we released the ET preview in the Shanghai Auto Show, we have attracted great attention from the market and our users. People are looking forward to our sedan product development. What we can say now is the next product will be a sedan, but I would like to ask for your patience.

[Foreign Speech]. We have a very comprehensive and detailed planning for our product development for the coming years. In the future, we see there is a need for the second plant, but right now we have a very successful cooperation with JAC. The products that we manufactured together with JAC has ranked at the top in many quality assessments conducted by the third parties. I'm very confident with our cooperation with JAC, and we do have room for improvement for the production capacity of our current plant. So we do not have an immediate need to kick-off the second factory, but we are now working on the planning of the second factory because of our product development cadence.

We don't need to say that we will build this plant by ourselves. So what we need from the Company's perspective is to make sure we have a sufficient capacity to support our product development and deliveries. We are now preparing the sufficient capacity for the products that we are going to launch in 2022.

[Foreign Speech]. Another point is about the current, NIO-JAC plant, without significant investment, we should be able to increase the production capacity of our current plant to 150,000 units under two shifts.

Paul Gong - UBS - Analyst

Thank you. That's very helpful.

Bin Li - Founder, Chairman and Chief Executive Officer

Thank you, Paul.

Operator

Thank you. We have our next question from the line of Alex Potter from Piper Sandler. Please go ahead.

Alexander Potter - Piper Sandler - Analyst

Hi, thanks very much. I have one question on selling regulatory credit. You probably are seeing that Tesla gets a fair amount of revenue, several hundred million dollars a quarter from selling regulatory credit to non-compliant auto brands, primarily in Europe. And I know that China is considering a similar credit trading system. And I'm wondering if you are having discussions with any foreign auto brands or other auto brands to prepare to sell those automotive credits in the future in China? That's my first question.

Bin Li - Founder, Chairman and Chief Executive Officer

[Foreign Speech].

Thanks for your question. This year the Chinese government launched the NEV and CAFC - [Speech Overlap] [Foreign Speech]

Okay. Thanks for your questions. This year, the government has updated their policy of the NEV and the CAFC credit, which they have launched in the past, which has helped us to increases the value of the credit that we have now on our hands.

[Foreign Speech]. So we have accumulated around 100,000 due credits last year. According to the current pricing in the market, we should be able to generate RMB120 million for the revenue of the credit. We are now talking to some OEMs. We plan to sell those credits in the third quarter or the fourth quarter. We believe this is going to help us with the gross margin improvement. Different from Tesla, we're not going to account this as part of the vehicle margin. We're going to consider this as part of the gross margin.

[Foreign Speech]. This year, we believe we're going to accumulate around 200,000 credits, which will be sold next year with increased pricing. Of course, the pricing will depend on the demand and the supply in the market, but we believe that this is the future direction because the Chinese government would like to make sure that we use the credit to replace the subsidy and encourage OEMs to produce EVs. And we believe that there will be a very big market for the credit trading between different OEMs.

Last year with 20,000 units, we have achieved RMB120 million of revenue, which means that for each vehicle, it can generate RMB60,000 revenue. With increased pricing, we believe this is going to benefit our gross margin in the long-term. Thank you.

Alexander Potter - Piper Sandler - Analyst

Thanks very much. That's very interesting. I'll pass it on.

Operator

Thank you. As there are no further questions, I would like to hand the call back to our presenters for any closing remarks. Thank you.

Rui Chen - Director of Investor Relations

Thank you again for joining us today. If you have any further question, just contact NIO's IR team through the contact information provided on our website. This concludes the conference call. You may now disconnect the line. Thank you and stay safe.

Jade Wei - Assistant Vice President, Head of Investor Relations

Thank you.

Wei Feng - Chief Financial Officer

Thank you.

Jade Wei - Assistant Vice President, Head of Investor Relations

See you next quarter. Bye.

Bin Li - Founder, Chairman and Chief Executive Officer

Thank you. Bye-bye.

Operator

AI Assistant

NIO INC

Q2 2020

Earnings Transcript

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