XPeng Inc. (NYSE:XPEV) Q3 2023 Earnings Call Transcript November 15, 2023 8:00 AM ET
Alex Xie – Head of Investor Relations
Xiaopeng He – Co-Founder, Chairman and CEO
James Wu – Vice President of Finance and Accounting
Brian Gu – Vice Chairman and President
Charles Zhang – Vice President of Corporate Finance and Investments
Conference Call Participants
Tim Hsiao – Morgan Stanley
Ming Hsun Lee – Bank of America
Tina Hou – Goldman Sachs
Paul Gong – UBS
Jing Chang – CICC
Nick Lai – JP Morgan
Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2023 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded.
I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations of the company. Please go ahead, Alex.
Thank you. Hello everyone and welcome to XPeng’s third quarter 2023 earnings conference call. Our financial and operating results were issued via Newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xpeng.com.
Participants on today’s call from our management team will include our Co-founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investment, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu, and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website.
Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Security Legislation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws.
Please also note that XPeng’s earnings press release and this conference call include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. XPeng’s earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.
I will now turn the call over to our Co-founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.
[Foreign Language] [interrupted] Hello everyone, today I’m pleased to report to our shareholders and customers that after three quarters of transformation and effort, we have entered into the initial phase of a virtuous cycle, driving improvements in sales, brand image, team morale, and free cash flow. It is extremely difficult to deliver such a turnaround in the smart car manufacturing industry. Therefore, I would like to express my gratitude for your support and patience throughout the journey. Going forward, we’re confident in achieving rapid sales growth and notable improvement of gross margin in the fourth quarter. And we’re ready to gain considerable market share in 2024, achieving a high growth target that is significantly above the industry average.
China’s new energy vehicle industry has witnessed resilience and growth amidst increasingly intensified competition throughout 2023, creating great opportunities to reshape the industry landscape. The competition on electrification and smartification is speeding up the replacement of ICE cars with NEVs. And AI is revolutionizing the technical structure of smart EVs and transforming automakers business models. There are no shortcuts to ADAS technology. The only way to determine whether mass production and the inflection point of ADAS technology have been reached is the achievement of nationwide coverage with low cost, a high level of safety, and great customer experience across different models.
During our Tech Day on October 24, we launched the public testing of XNGP in the first batch of 20 cities where high definition maps are unavailable. Our plan is to expand our coverage to 50 cities by the end of this year. Our technology and AI will empower our customers to use ADAS wherever they drive throughout the country. XPeng has been a pioneer and leader in ADAS technology and its customer adoption. I strongly believe that the demand for ADAS will surge in the next five years, and XPeng will be the preferred smart EV brand for customers.
Next year, we’ll consolidate and integrate our full stack in house R&D capabilities in a wide range of systems, including the next gen EE architecture, the unified AD — ADAS domain, smart cockpit and voice assistant, brand new large language models, the next gen chassis and powertrain. As a result, we’ll be able to deploy multiple models for the global market rapidly and realize the integration of cars between different platforms, as well as between cars and other vehicles. I believe this will significantly enhance our engineering capabilities to support various products in the global market, strengthening our edge in smart technologies by integrating different systems.
Apart from our commitment to ADAS and smart EV technologies, we have made crucial changes to our corporate strategies, organizational structure, senior management team and product and technology roadmap over the past three quarters. Making various changes of such a magnitude simultaneously could have brought risks and impacts near term results. However, thanks to the mutual trust and endeavors of the whole XPeng team, these changes did not affect our short term performance. Instead, they allowed us to deliver better than expected results.
For the Q3 of 2023, our vehicle deliveries exceeded 40,000, representing a 72% increase quarter-over-quarter. Additionally, we achieved positive free cash flow with over RMB1 billion in cash inflow. We’re confident of setting a new record for vehicle deliveries in the Q4. Our target is over 6 million units — sorry, 60,000 units.
Regarding product sales, the G6 electric SUV has become the top selling vehicle in the RMB250,000 price range during its first quarter on the market. In October, over 8,700 G6 vehicles were delivered. This early success of the G6 is a strong validation of XPeng’s ability to create and introduce a new benchmark model in the relevant market segment. Thanks to our highly differentiated technologies and effective marketing. By doing so, we’re bringing smart EV technologies to a much broader customer base.
In September, we launched the 2024 edition XPENG G9 with a higher gross margin than that of the original version. This cost reduction was made possible through advancements in technology and engineering. In October, we delivered over 4,000 units of G9, making it one of the top selling electric SUVs in the RMB300,000 price segment.
In October, we achieved a record breaking sales month with over 20,000 vehicle deliveries and secured the top spot among EV startups for BEV sales volume again. We’re excited to announce that we will showcase our flagship MPV, the XPeng X9 at the Guangzhou Auto Show and start presale on November 17th. The X9 is a seven seater pure electric smart MPV built on the SEPA 2.0 architecture. It stands out from traditional MPV models with superior space, design, and maneuvering that perfectly combined the advantages of a MPV and SUV. Moreover, the X9 comes equipped with rear wheel steering as a standard configuration, enabling a turning radius similar to that of the P7. With XNGP, our industry leading technology that does not rely on high definition maps, maneuvering an MPV has never been easier and more agile. These technical capabilities are not found in any other MPV models on the market. X9 will be delivered from the beginning of January 2024. We’re confident that X9 will become the top seller in the large electric MPV market.
In 2024, we plan to launch highly competitive new models based on the SEPA 2.0 architecture. Additionally, we intend to introduce a new EV brand in the RMB150,000 price segment. Leveraging our partnership with DiDi, China’s leading mobility technology platform, we believe that this new brand will greatly accelerate our sales growth and expand our market share in the A Class EV market. Our team is currently on track to develop MONA, the first model under this brand with an expected launch date in the Q3 of 2024. We believe that MONA is just the beginning of an exciting journey, and we’re committed to pushing the boundaries of technology and keeping costs under control. This will enable us to launch smart EV models that boast autonomous driving technology in the mass market segment at a price point of RMB150,000 or RMB20,000. This move will give our product a significant edge over other models in the segment, allowing us to reach a wider audience in the [blue ocean] (ph) market segment.
Our President, Ms. Wang Fengying has been leading a significant overhaul of our sales network, making it more efficient, flexible and expanding faster to cover more Tier 3 and Tier 4 cities. We closed almost 100 low performing stores during the first three quarters this year and launched the Jupiter Project, a program to recruit more competent franchisee partners. We secured investment for over 100 new stores within two months and established cooperation with top tier dealer groups specializing in luxury vehicles. As we head into the fourth quarter, we’re accelerating new store openings and expanding our sales network to reach our goal of 500 stores by the end of the year or early next year. These upgrades and rapid expansions coupled with innovations and marketing will become one of the most important drivers for our sales growth in 2024 and beyond.
During late September, I had the opportunity to visit the Volkswagen Group’s headquarters in Wolfsburg. We had a detailed discussion with Mr. Blume and Volkswagen’s senior management regarding our comprehensive strategic partnership, which helped clarify the blueprint for our long term strategic cooperation in technology. We also explored deeper strategic cooperation opportunities in the international market. Currently, we’re jointly developing models based on the G9 platform, which is in full swing. The strategic cooperation in the supply chain is also progressing effectively, and we expect cost reduction in the supply chain to generate meaningful results in the next year.
To enhance our cost control, we learn from the best practice of OEMs in the industry. The progress of cost reduction in the entire process of design, R&D and manufacturing and marketing has given me confidence in accelerating the progress to reach the goal of 25% cost reduction by the end of 2024 or even exceeded, which will significantly increase the gross profit margin next year.
Let’s look at the cash flow. We had approximately RMB36.5 billion in cash at the end of the Q3 of 2023, and we generated over RMB1 billion in positive free cash flow during the same quarter. With our new products and technology driven cost reduction, we expect to see a significant improvement in our gross margin resulting in even stronger positive free cash flow in the Q4. This is an important milestone for us to achieve profitability at scale in the long term.
Looking ahead, we’re projecting our total vehicle deliveries to be between 59,500 and 63,500 units in the fourth quarter of 2023 with a quarter-over-quarter growth rate of 48.7% to 58.7%. We expect our revenue to be between RMB12.7 billion and RMB13.6 billion during this period. We are committed to implementing transformation primarily in our organization and marketing strategy, which we believe will produce more favorable results in 2024 and beyond. This in turn will enable us to accelerate our growth and expand our scale from the fourth quarter of 2024. Our aim is to capitalize on global opportunities arising from our leadership in smart EV technologies, improve our organizational efficiency and gain a dominant market share. Our ultimate goal is to establish XPeng as the top smart EV company by 2020 — by 2030.
Thank you, everyone. And with that, I’ll now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for the Q3 of 2023.
Thank you, Xiaopeng. Now, I’d like to provide a brief overview of our financial results for the third quarter of 2023. I’ll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB8.53 billion for the third quarter of 2023, an increase of 25% year-over-year and an increase of 68.5% quarter-over-quarter. Revenues from vehicle sales were RMB7.84 billion for the third quarter of 2023, representing an increase of 25.7% year-over-year and an increase of 77.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to the accelerating sales growth of the G6 in the third quarter of 2023.
Gross margin was negative 2.7% for the third quarter of 2023 compared with 13.5% for the same period of 2022 and negative 3.9% for the second quarter of 2023. Excluding the negative impact attributable to the G3i and the production as we described in the prior quarter, the gross margin would have been breakeven for this quarter. Vehicle margin was negative 6.1% for the third quarter of 2023 compared with 11.6% for the same period of 2022, and negative 8.6% for the second quarter of 2023. The year-over-year decrease was explained by: first, the inventory write downs amounting to RMB0.23 billion related to the Model G3i as we finished the rest of the production in its life cycle with a negative impact of 2.9 percentage points on vehicle margin; and secondly, increased sales promotions and the expiry of new energy vehicle subsidies. The quarter-over-quarter increase was primarily attributable to the improvement in our product mix and battery cost reduction.
R&D expenses were RMB1.31 billion for the third quarter of 2023, representing a decrease of 12.9% year-over-year and a decrease of 4.5% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly in line with the development timing and progress of new vehicle programs.
SG&A expenses were RMB1.69 billion for the third quarter of 2023, representing an increase of 4% year-over-year and an increase of 9.6% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the higher commissions paid to our franchise stores. As a result of the foregoing, loss from operations were RMB3.16 billion for the third quarter of 2023 compared with RMB2.18 billion for the same period of 2022 and RMB3.09 billion for the second quarter of 2023.
Fair value loss on derivative liability was RMB0.97 billion for the third quarter of 2023. On July 26, 2023, our company entered into an agreement with Volkswagen Group to issue up to 4.99% of our company’s ordinary shares for a fixed purchase price of $15 per ADS. Until the transaction closes, fluctuations in the fair value of the forward share purchase agreement were measured through profit or loss, resulting in a non-cash loss of RMB0.97 billion for this quarter.
Net loss was RMB3.9 billion for the third quarter of 2023 compared with RMB2.38 billion for the same period of 2022 and RMB2.8 billion for the second quarter of 2023. Non-GAAP net loss, which excludes share based compensation expenses and fair value loss on derivative liability was RMB2.79 billion for the third quarter of 2023 compared with RMB2.22 billion for the same period of 2022 and RMB2.67 billion for the second quarter of 2023.
As of September 30, 2023, our company had cash and cash equivalents, restricted cash, short term investments and time deposits in total of RMB36.48 billion. The positive free cash flow in Q3, as Xiaopeng mentioned earlier, was the main driver for our higher quarter-over-quarter cash balance. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our third quarter financial results.
This concludes our prepared remarks. We’ll now open the line to questions. Operator, please go ahead.
Thank you. [Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley. Please go ahead.
[Foreign Language] So my first question is about the competition. As we noticed that there are more tech companies like Huawei and Xiaomi challenging [indiscernible] makers. We noticed that tech companies have the advantages of a cross division ecosystem, as well as the channel that remain quite difficult for carmakers to replicate. How would they expand backup for such as short comments versus tech players in the following quarters. That’s my first question. Thank you.
[Foreign Language] [interrupted] Thank you so much for your question. This is Xiaopeng. Now this is a very good question, but not an easy question. I would like to start by reviewing my past entrepreneurial experience. I first started with an international Internet company and also — and then I went on to invest in XPeng. I mean, your question has always been a question of thinking for many years in the past of my experience. Let me give you an example. When I was in the Internet — mobile Internet business, we saw a lot of competition, and there are different ways to compete in that landscape. For example, people turn to acquiring traffic, and that is a good way to actually make up for different shortcomings in the ecosystem or the lack of different capabilities or abilities in different aspects. And you saw a lot of crossover from different players in different sectors. And you realize that the problem with using or relying purely on traffic is that there are a lot of media that has traffic that is not transferable. Let me give you an example. Audience from traditional — watching traditional TV may not be the same audience who rely so heavily on mobile phones, etcetera. And so that actually leads to a lot of failures. But right now you also are seeing a lot of competitions from players across different sectors who tried to actually enter a new domain using different ecosystem or capabilities from their own sector. For example, you see players from the real estate, the smartphone industry and also from the Internet and a lot of tech companies as well.
So when we compare ourselves against these players from other sectors, we have to really come down to our internal capability. We have to look at what we have as our strength. For example, we are very strong with our technology. We’re very strong with our AI capability and also manufacturing capability, as well as our supply chain as well. So really, what help us to differentiate ourselves and stand out from the cloud is that, we can actually focus on what we already have and expand using different partnerships. For example, we’ve been started — we have being very committed to actually expand our ecosystem by, for example, investing in our other formats of mobility, different vehicle formats. We have invested in our robotics technology and flying cars, etcetera. We also have announced our partnership with Volkswagen in different aspects, including supply chain technology, global sales and marketing and also after sales services as well. And in August, we also announced our partnership with DiDi, a leading, mobility tech platform, to expand our market share in A Class vehicle segment, also to build the foundation for our future expansion in robotaxi, etcetera.
Now these are just some of the examples of how we try to make up for our shortcomings in the ecosystem. And we believe that by combining different capabilities through this partnership, we can actually strengthen our overall competency, building on the strong foundation that we already have, which is our technology and our core manufacturing capability as a car maker. Thank you.
[Foreign Language] So my second question is about the pricing power, because as mentioned already in the call, I think the company target is to cut the 2024 production cost by 25% as the company optimizes design efficiency, etcetera. However, without enhancing the pricing power, very likely the benefit of cost saving might still be depleted by the constant price under cutting, especially quite a lot of car makers outsource their pricing strategies these days to like test on BYD and just respond passively. So how does XPeng plan to strengthen its pricing power on top of the cost reduction into 2024? That’s my second question. Thank you.
[Foreign Language] [interrupted] Thank you for your question. First of all, I agree with your opinion that pricing power is very important. And in the long term, we definitely want to become the apple in auto making, which has very, very strong bargaining power and pricing power. As a carmaker, an OEM, we believe that there are several aspects that’s important that’s affecting our pricing power. One is scale and the other is cost control capability as well as our branding and differentiation. Defiantly the scale of sales affect our cost and it’s also the same the other way around. And right now, we are in the process of reshaping our overall capability as well as our brand. It is very important that we can actually, first of all, build our brand image, as well as contributing to the customer value by really strengthening our differentiation.
Our President, Ms. Wang Fengying is a big advocate on internal and also systematic innovation. So going forward, going into 2024 and 2025, we will continue our effort and commitment in scaling up our sales and volume, controlling our costs, building our brand as well as our differentiation in order to gain a bigger pricing power. Thank you.
[Foreign Language] Thank you very much for sharing all the great insight. Thank you.
Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.
Ming Hsun Lee
[Foreign Language] So after, Ms. Wang joined XPeng, the channels sales stores reforming is continuing. So, do you have any metrics regarding — to evaluate your progress on your channel reform. And besides that, do we have any targets to — about the long term direct sales and then also dealership percentage.
[Foreign Language] [interrupted] Thank you for your question. Now I would like to address this by giving you a little bit of background information about our President, Ms. Wang. She comes from [indiscernible] Great Wall, a traditional OEM, and she has been excellent in controlling costs, developing channels and also leading innovative systematic overhaul of the company. So in the first few months that she joined our company, she spent a little time observing what we currently have. We used to have this hybrid channel of having our cell phone stores together with some franchisee stores, but we had total control of the pricing for all of the stores. I mean, all of the channels. And going into Q3, I mean, for the past quarter in Q3, we have already set our future strategy of channel innovation or reform, which will actually cater to different kinds of dynamics or changes coming — going into 2025 to 2026. We are talking about, for example, significantly more models that we’re going to launch in 2025. And also we take into consideration the future of market competition, market environment and also our future expansion to cover not just Tier 1, Tier 2 cities, but also Tier 3, Tier 4 as well.
So in the mid to long term, we aim to have, at least five franchised stores that are capable of not only doing sales, but services as well. And in the mid to long term, we also plan to have a total of at least 1,000 service centers across the country that can help us to provide better services to our customers. And going to Q4, we plan to open 100 new stores that can allow us to expand our sales network, more extensively. And so by the end of 2023, we’re going to have a total of 500 stores of different modes. And over time, because it takes time for those new stores to build up their capability and experience. So we believe that the time of the Q1 and Q2 next year will be the time when we can actually see a lot of growth in our deliveries in sales and that call also allow us to see growth in deliveries and sales in lower tier cities in China as well, because we are going to build more stores in those areas and regions.
I mean, in terms of the pricing control, we will remain very strong in terms of the — the extent of price control and we are going to evaluate the performance of different stores from different aspects, including their NPS, and we can equip them and empower them with a wide range of tools, and we can control the procedures, and we can do a lot more things to maintain our strong control of the service qualities of those stores as well. Now in terms of the efficiencies of the performance of the stores, I agree with you and we believe that it is very important that we keep improving the overall efficiencies of our stores, because currently we see still a lot of room for growth there, for improvement there. And by 2024, we expect to see a huge uptake in terms of the efficiencies of our store. Thank you.
Ming Hsun Lee
[Foreign Language] So my second question is related to export business. So in October, you also shipped a few thousands of cars to overseas market. So in the future, will you consider to build more direct operated stores or you will rely more on the distributors locally? Then regarding your current product portfolio, do you think you will export all the models overseas or you will select a few models for overseas market? And lastly, do you have any plan for Southeast Asia market?
Hey, Ming, it’s Brian. Let me address your question. Regarding the international expansion, you’re correct that we currently employ sort of hybrid model in the Nordic countries. We have direct owned stores, as well as our partnership and agents. But going forward, we’re probably going to opt to use a more of a collaborative partnership model using either agents or distributors for specific markets. So that’s probably going to be likely — the mix will shift towards a more partnership oriented model.
And in terms of products that for international markets, you saw that we currently have G9 and P7i currently selling in Europe already. We will be launching G6 as a global product next year. So I would say, it’s only the subset of product that we will design and prove for international use, not all our products. So the products I mentioned are the ones that we currently decided for global markets. And also we have plans for right hand driving models next year as well. For example, by the end of next year, we plan to roll out our first right hand driving model, likely to be based on the G6 model. So with that, we’ll be able to tackle Southeast Asia market. So that will definitely be in our sight. And we’ll be also looking at other right hand driving model markets as well.
Ming Hsun Lee
Yes. Thank you, Brian. I don’t have any questions. Thank you.
Your next question comes from Tina Hou with Goldman Sachs. Please go ahead.
[Foreign Language] Thank you very much for your time management. So my first question is regarding our sales volume. So according to our fourth quarter sales volume guidance, it seems that November and the December will be flat versus the October volume. So just wondering, what is the reason here? Are we just being conservative or is there any specific trends that we’ve observed in the industry?
And then the second question is regarding gross margin. So management mentioned excluding the impairment loss of G3, the vehicle gross margin was breakeven in third quarter of 2023. So the last time we delivered over 40,000 units of vehicles was in the fourth quarter of 2021. And then back then, the vehicle gross margin was actually 10.9%. So, just wondering what is leading to the differential in gross margin.
And also related to that, management mentioned that next year, we’re expecting to see a great gross margin enhancement. Obviously, we know the cost reduction is pretty on track even ahead of our progress, but then how much price decline are we factored into the — this gross margin expectation? Because we see that this year, for the three quarters this year, and average ASP actually declined by 6% year-over-year. So how much of the competition are we factoring in into next year in terms of gross margin guidance? Thank you.
So Tina, let me — this is Brian. Let me first answer your first question. The guidance of 60,000 this quarter, I think, reflect our confidence of the progress we’ve made in the recent months. We think it’s actually a very poor milestone for us to reach on average 20,000 per month. So this is, I think, is a very, I would say, important milestone for us. And also by giving this guidance, we also are considering the competition as well as the macroeconomic backdrop that we’re facing in the Q4. We are very confident with the guidance, because, obviously, backlog we have already, as well as the momentum we’re seeing in our order intake. But I think this is also reflective of the market at the moment and we hope that this is a realistic target for us.
And I’ll hand over to James for the gross [margin] (ph) comments.
Yes, Tina. From a gross margin perspective, first of all, as we talked about earlier, even if we compare to — on a year-over-year basis, the reduction in margin came from, as you mentioned, the G3 EOP impact that we have booked in this quarter. And this is — this will be the final impact from the G3 EOP perspective. And secondly, going into 2023, the new energy vehicle subsidy has been removed from the market and that, obviously, has an impact on our margin as well. You did mention our ASP has reduced over time. I believe that’s overall market dynamic as well, because we are — we’ve been trying to improve the product competitiveness for our product as well throughout this journey. In the meantime, as Xiaopeng mentioned, we do expect our gross margin to improve in Q4 meaningfully, particularly our vehicle margin will become positive, we believe in the fourth quarter. And one proving factor as we improve our product mix is that, as we launch the new G9 2024, we see the gross profit margin is actually higher than our older version of G9. This is a great proving point for us to continue to drive profitability of our products. I hope hopefully that answers your question.
[Foreign Language] I just have a very quick follow-up. So in terms of the cost reduction technology improvement cost reduction, which are the models that can benefit from the cost reduction? Thank you.
[Foreign Language] [interrupted] All of the models that we have will benefit from the cost reduction, driven by technology advancement. But among our top selling models, we are going to put more efforts into driving up the cost reduction. Thank you.
Your next question comes from Paul Gung with UBS. Please go ahead.
[Foreign Language] So my first question is regarding the positioning of the MONA brand. I understand the pricing point is generally lower than our main brands, but it’s not really too much lower. And how shall we differentiate the brand positioning of the two brands? Is MONA also going to be available at our current stores to be sold to [indiscernible].
[Foreign Language] [interrupted] Thank you. We are going to disclose more information regarding MONA next year, I mean, 2024. We’ll talk about this new brand in terms of its branding positioning, its channels and after sales services. And right now, we are actively preparing for the launch of MONA for next year. One thing that I can’t address or I can share is that, there’s definitely going to separate channels — going to have separate channels to sell MONA with — apart from our current XPeng lineups.
[Foreign Language] So my question — my second question is regarding your earlier comments. You have discussed with Volkswagen regarding the global markets. How do you think the business model between Stellantis and the motor that’s bring the Chinese products, leverage with global OEMs, global footprint and bring to the global market. Would that accelerate your globalization in terms of the market reach?
Hey Paul, this is Charles here. I’ll address the question. I think first of all, our joint development on the — for the model based on the G9 platform has been going on really efficiently. And I think we’re going to achieve a milestone very soon. And I think the international market collaboration is one of the strategic initiatives we are exploring with our partner Volkswagen. And I think that we are — I think Volkswagen has global manufacturing footprint and also the supply chain capabilities. I think there’s a lot of areas we can learn from our partner and also leverage each other’s strength in the international market. We wouldn’t comment on other companies’ collaboration model. Thank you.
Your next question comes from [Ping Hui Wu] (ph) with CITIC Securities. Please go ahead.
[Foreign Language] So my first question is about — to sell cars in the lower tier markets, how do we think of the demand for the lower tier cities and how do we utilize our strengths in those markets?
[Foreign Language] My second question is about the research and development for the 2024. What will — will the R&D total amount like increase next year? And where will this money be spent on? Thank you.
[Foreign Language] [interrupted] Let me address your first question. Regarding our product lineup, we are going to meet the lower tier city demands by offering MONA and other new products. And right now, we’re not in a position to disclose too much specific information, but what I can see — what I can say right now is that, we aim to offer top notch ADAS technology and capabilities to a lower tier market as well, including Tier 2, all the way to Tier 4 cities, audience — I mean, customers. And we are going to set those autonomous driving capability as standard configurations in our future lineups for those cities as well. And we are also going to reform our distribution channels for the lower tier market. Thank you.
Regarding your second question on the R&D expenses, actually we’ve been putting in a lot of thoughts in the past three quarters and we’ve actually done a lot in — starting from the beginning of this year to reduce our R&D fee. Let me give you several examples. When we started the overhaul in our restructuring of the organization. The first thing that we did is to cut R&D expenses. And we also have been advocating this module based design rationale that can allow us to put everything on the same architecture, the SEPA 2.0. We also have actually encouraged and asked our suppliers to put their R&D expenses into the BOM to reduce the overall R&D expenses on our front.
The last thing that we — another thing that we did was to actually equipped our R&D team with more systematic tools and ways that could allow better integration and mutual compatibility of different parts, so that our overall R&D expenses can be cut even further. So going into 2024, we are going to actually strengthen several capabilities. The first one is our overall design capability of our models and products. We also will strengthen our craftsmanship, which is also critical in manufacturing. We will continue to improve our smartification, I mean, the intelligence of our products. We’ll also do R&D improvement in the — for the international market to strengthen our globalization capability. And we will also put in some R&D efforts to prepare for our long term development and also for our long term strategy as well. So in terms of the absolute value of our R&D expenses in 2024, definitely it’s going to be higher than this year.
The next question comes from Jing Chang with CICC. Please go ahead.
[Foreign Language] Okay. This is my only one question. Regards to autonomous driving, which we believe will become the key sector in the field next year. So how do we expect the seat of autonomous driving to reshape the contacted landscape of the industry? We will be very quickly to be seen in the maybe next one to two years, or will we take much longer time? We also see that many traditional OEMs have chosen to cooperate with other companies in the practice of autonomous driving. So in contrast, can you share some details of our — advantages of our in house research?
[Foreign Language] [interrupted] Thank you for your question. This is Xiaopeng. I think the upcoming five years will actually ushering an era of rapid development for ADAS adoption and technology development. It’s going to be very similar to the stage where we see the rapid development of NUV penetration from back in 2018 to 2022. And I remember back in 2020, we saw a huge uptake in the penetration rate of new energy vehicles in the market. And I think right now in terms of ADAS technology adoption. We’re still in a warming up stage in terms of the technology readiness and also for the whole industry as well. We definitely are seeing more and more younger customers who are embracing this new technology, who are willing to try this new experience. And in the future, we are very optimistic about the adoption rate improvement, because we — first of all, we’re very excited to see that there are more and more participants in the industry that are helping us to educate a wider audience that are cultivating the market to get it ready for this upcoming exciting era of ADAS adoption.
Now regarding our advantages or strength in having this full stack in house R&D capability, there’s a long list of examples of strength that I can give you. I mean, just to name a few, localization of the self-development of the technology is one of them. And the second thing is to control the cost of production, because even though we are seeing a wider customer base that are trying to embrace the technology, they still want to have both safety, in terms of experience and also affordability as well. So having full stack development capability definitely allow us to control the cost better. And another good advantage of having that capability is that, it can allow us to embrace upcoming and their cutting edge technology very timely as well.
For example, in the past year, we saw this emergence of the application of large language models and having full stack R&D capability allow us to do full domain end-to-end application of this new technology, which would not be possible without that capability and that is actually happening without a lot of our peers who are struggling to adopt new technology as well. And another good point that I would like to make is that, we are seeing more and more — tighter and tighter coupling with AI technology with car manufacturing capability or R&D capability, and we need to have, for example, the next gen EE architecture, the unified ADAS domain, start cockpit and voice assistant to actually embrace this tighter coupling with AI technology. And that actually requires a lot of integration on not just the hardware level, but also hardware together with software and AI as well. And we are very proud that currently we are very capable of doing that, thanks to our full stack R&D capability.
And the last question is coming from Nick Lai with JPMorgan. Please go ahead.
[Foreign Language] [indiscernible] interested in my question very briefly. I recall in the second quarter results call, management indicated that the 4Q vehicle margin will likely turn to positive territory. Is our guidance is still so at the moment and at the same time we are launching the new A segment sedan under MONA brand with pricing point of about RMB150,000. At the same time, the new product will be equipped with a high end ADAS product. How do we reconcile the capacity competition in the low end segment and also the sector [indiscernible] with much more advanced ADAS content? Thank you.
Hey, thanks, Nick. This is James. So I’ll answer your questions one by one. First of all, to reconfirm, we do believe our fourth quarter vehicle margin will turn positive to confirm your question. And this is bolstered by better mix of products in Q4 compared to Q3. And, as I mentioned earlier, we did see some level of battery cost reduction that came through towards the end of Q3. So for Q4, we’ll see a full quarter of battery cost reduction coming through, empowering the lithium prices stable over time.
Going into 2024, we do expect our gross margin to be meaningfully improved versus 2023 on a full year basis. And this is also bolstered by our continued cost reduction to achieve our 25% or even more cost reduction targets, as Xiaopeng mentioned earlier. We will have better product mix next year as we launch, for example, G9, which will be, amongst the highest — X9, I’m sorry. X9, the highest gross margin product at this point in our portfolio. And obviously, the new products coming from our SEPA 2.0 platform, next year we’ll be — we’ll have better margin as well.
And lastly, to your question on MONA. You’re correct, it is targeting A segment. But we do see that MONA has a very good cost control and planning process, very competitive from a cost perspective, first of all. And second of all, MONA will help us achieve great scale, which will benefit to the entire company from a scale perspective as we’ve seen our cost allocation and therefore improve our margin. And lastly, we do expect more controlled associated sales expense related to the MONA sales because of the scale. So it should not be a drag from a bottom line perspective, in terms of profitability. Thank you.
Was there a follow-up question?
No, that’s clear. Thank you. It’s clear.
Thank you. As there are no further questions now, I’d like turn the call back over to the company for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng’s investor relations through the contact information provided on our website or the Piacente Financial Communications.
This concludes today’s conference call. You may now disconnect your line. Thank you.