Nio Group Q2 2026 Earnings Live Broadcast
[AI Key Takeaways]
Financial Performance
- Total revenue reached RMB 32.1 billion in Q2 2026, up 69.1% year-over-year and 25.9% quarter-over-quarter
- Vehicle sales revenue amounted to RMB 29.1 billion, increasing 80.1% year-over-year and 27.5% quarter-over-quarter
- Overall gross margin was 18.4%, with automotive gross margin at 18.5%, a significant increase from 10% in the same period last year
- Achieved non-GAAP operating profit of RMB 200 million, with both operating cash flow and free cash flow turning positive
Business Progress
- Delivered 107,658 smart electric vehicles in Q2, a 49.4% year-over-year increase
- Nio brand deliveries totaled 60,945 units, leading the passenger car market priced above RMB 350,000
- ONVO brand delivered 29,124 vehicles; Firefly brand delivered 17,589 vehicles
- ES8 reached the milestone of 140,000 deliveries within 335 days; ES9 has started deliveries with strong demand
Next Quarter Guidance
- Total deliveries in Q3 2026 are expected to range between 108,000 and 111,000 units
- Targeting average monthly deliveries exceeding 40,000 units in Q4
- Vehicle gross margin is projected to remain at the Q2 level of 18.5% in Q3 and Q4
- Annual capital expenditure is estimated at RMB 6-7 billion, similar to last year
Opportunity
- Market expansion: Accelerate the promotion of ONVO Sky Stores to reach family users in lower-tier cities
- Product innovation: Plan to launch strategic new ONVO models and new Nio Series 5 and 6 products next year
- Strategic cooperation: Collaborate with over 40 state-owned enterprises across more than 25 provinces through the charging partner program to build charging infrastructure
- Operational efficiency: Fifth-generation battery swap stations enhance operational efficiency and reduce construction costs
Risks
- Market Competition: The sub-segment where ONVO operates is highly competitive, with a greater number of brands and models than in the Nio and Firefly segments.
- Cost Pressure: Facing rising costs for raw materials and chips, the average cost per vehicle increased by RMB 14,000 in the second quarter.
[AI Conference Transcript]
Operator
For NEO Incorporated second quarter 2026 earnings conference call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Roy Chen, AVP and Head of IR Corporate Finance and Strategic Investment of the Company. Please go ahead, Roy.
Roy Chen
Good morning and good evening, everyone. Welcome to the Neil's second Quarter 2026 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website.
On today's call, we have Mr. William Lee, Founder, Chairman of the Board and Chief Executive Officer and Miss Danny Chu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the 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 views expressed today. Further information regarding risks and uncertainties is included in certain signing of the Company with the US 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 news earning press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures.
Please refer to news press release, which contains a reconciliation of the unaudited non GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Lee. William, please go ahead.
William Lee
Thank you very much for joining Nio Inc.'s Q2 2026 earnings conference call. Hello, everyone, and thank you for joining Nio Inc's 2026 Q2 Earnings call. In the second quarter, the company delivered a total of 107,658 smart electric vehicles, representing a year-over-year growth of 49.4%. Delivered a total of 107,658 Smart EVs, achieving year over year growth of 49.4 percent.
In the second quarter, Nio's three major brands—Nio, Onvo, and Firefly—all achieved year-over-year and quarter-over-quarter growth in both sales volume and average transaction prices. Specifically, the Nio brand delivered 60,945 new vehicles, ranking first in China's passenger vehicle market with transaction prices above RMB 350,000 across all powertrain types. The Onvo brand delivered 29,124 new vehicles, continuing to unleash its growth potential. The Firefly brand delivered 17,589 new vehicles, maintaining its lead in the premium compact car market.
In Q2, the Nio, Onvo, and Firefly brands all achieved year-over-year and quarter-over-quarter growth in both sales volume and average transaction price. More specifically, the Nio brand delivered 60,945 vehicles, leading China's passenger vehicle market with transaction prices above RMB 350,000 across all powertrain types.
The Onvo brand delivered 29,124 vehicles, demonstrating strong growth momentum, and the Firefly brand delivered 17,589 vehicles, maintaining its leadership in the high-end compact car market. In July and August, the company delivered 35,934 and 35,836 smart electric vehicles, respectively. Looking ahead to Q3, we expect total deliveries to range between 108,000 and 111,000 units.
In July and August, the company delivered 35,534 and 35,836 vehicles, respectively. In Q3, total deliveries are expected to range between 108,000 and 111,000 units. Regarding financials, the company's consolidated gross margin in the second quarter was 18.4%, driven by the continued strong sales of high-margin models and further optimization of the cost structure.
Despite pressure from sharply rising raw material and chip costs, the vehicle gross margin remained solid at 18.5%. The gross margin for other sales reached 17%, with services and community-related businesses continuing to contribute to profitability. On the financial side, in Q2, the company's gross margin stood at 18.4%, driven by continued strong performance from higher-margin products and ongoing cost optimization.
Despite pressure from sharply rising raw material and chip costs, the vehicle gross margin remained solid at 18.5%. The gross margin of other sales was 17%, with services and community-related businesses continuing to contribute to profitability.
The company maintained non-GAAP operating profit and achieved positive operating cash flow and free cash flow. Cash reserves further increased to RMB 56.7 billion, strengthening the operational fundamentals and providing stronger financial support for the company's long-term sustainable growth. The company continued to generate non-GAAP operating profit as well as positive operating cash flow and free cash flow, further increasing its cash reserves to RMB 56.7 billion.
This helped strengthen the company's business fundamentals while laying solid groundwork for its long-term sustainable development. Now turning to our product, R&D, and operations. Regarding the Nio brand, on July 9, the all-scenario tech flagship SUV ES8 five-seater version was officially launched and deliveries began shortly after. Its spacious five-seat configuration better meets users' diverse mobility needs across various scenarios.
Since its launch, the new ES8 has shown consistently strong market performance, achieving its 140,000th vehicle delivery within just 335 days. It maintains a leading position in both the RMB 400,000-tier passenger vehicle market and the large SUV segment. In J.D. Power's user recommendation index study, the Nio ES8 ranked first among pure electric models, achieving a double victory in both sales volume and user reputation.
Meanwhile, deliveries of the tech-administrative flagship SUV ES9 began at the end of May, gradually converting users from traditional luxury fuel SUVs. In June and July, it ranked first in sales volume in China's passenger vehicle market with transaction prices above RMB 500,000. The continued ramp-up of flagship models has further consolidated Nio's leading advantage in the high-end pure electric market.
Overnight, the flagship ES9 SUV was launched and began deliveries of its five-seat variant, catering to more diverse user needs and scenarios. With its five-seat layout and spacious interior, the ES8 has maintained strong momentum since its launch, achieving a delivery milestone of 140,000 units in just 335 days. It leads China's passenger vehicle segment in the RMB 400,000 price range and the large SUV segment.
In the Net Promoter Score (NPS) survey by Land Rhodes, the Nio ES8 achieved the highest NPS among battery electric vehicles (BEVs), ranking first in both sales volume and product reputation. Meanwhile, the flagship executive SUV ES9, which began deliveries in late May, has started winning over users from traditional luxury fuel-powered SUVs, leading sales volume among passenger vehicles with transaction prices above RMB 500,000 in June and July.
The continued strong performance of new brands' flagship models has further strengthened their leading position in the premium B-segment market. The L90 has completed its first full year of deliveries, with cumulative sales exceeding 60,000 units, ranking first in the RMB 300,000-class pure electric large SUV market. The Onvo L80 has seen continuous and stable deliveries, gaining widespread user recognition thanks to its exceptional cargo space and scenario-based product capabilities.
In the second quarter, leveraging the outstanding product advantages of the L90 and L80, the Onvo brand ranked first among large SUVs with transaction prices below RMB 300,000. Meanwhile, the upgraded L60 achieved comprehensive enhancements, precisely matching target user needs and providing strong support for Onvo's overall sales volume.
For the Onvo brand, the L90 surpassed 60,000 deliveries within its first year since launch, ranking number one among large battery electric SUVs priced around RMB 300,000. The L80 continued to see steady deliveries, winning acclaim with its exceptional cargo space and scenario-based functionality in Q2.
Leveraging the outstanding product strength of the L90 and L80, Onvo became the sales leader among large SUVs priced below RMB 300,000. In addition, the upgraded L60 better meets the needs of its target users, further strengthening ongoing sales momentum.
Firefly has ranked number one in market share among high-end compact cars in China for 15 consecutive months, solidifying its leadership in this niche market. With precise product positioning and a unique brand identity, it continues to gain recognition from target users.
On the 8th, we rolled out the new version of the Nio World Model to over 700,000 Nio and Onvo users. This upgrade further explores the potential of the Nio World Model combined with a closed-loop reinforcement learning technical architecture, delivering significant iterations in functional experience. Following two major version updates this year, overall user adoption rates have continued to rise.
Since the upgrade, the mileage driven using Urban Navigate on Pilot by Nio users increased by 92.8% month-over-month. Onvo users also experienced a comprehensive upgrade; post-upgrade, the mileage driven using Urban Navigate on Pilot by Onvo users increased by 100% month-over-month.
In terms of smart driving, on June 18, the latest version of the Nio World Model was rolled out to over 700,000 Nio and Onvo users. As the second major release this year, the new version further leverages the World Model architecture and closed-loop reinforcement learning, delivering significant enhancements in functionality and user experience.
User adoption has continued to grow since the upgrade. Mileage accumulated by new users using Urban NOP increased by 92.8%. The upgrade also covered all existing onboard users, whose mileage with Urban NOA increased by 127.8% following the update.
Leveraging top-tier model algorithm system architecture and robust engineering implementation capabilities, Nio is the first automaker in the industry to achieve synchronized development and release of its smart driving systems across both general-purpose chip platforms and proprietary chip platforms. We enable users across different platforms and brands to enjoy a consistently leading autonomous driving experience throughout the vehicle's life cycle, delivering an intelligent mobility experience that remains fresh and up-to-date.
Powered by leading model algorithms, systematic architecture, and strong engineering capabilities, Nio is the industry's first automaker to develop and roll out smart driving systems in parallel across general-purpose and proprietary chip platforms. With a common software branch and synchronized releases, users across different technology platforms and brands can enjoy a continuously evolving, industry-leading smart driving experience throughout the vehicle life cycle.
Regarding our sales and service network, as of now, we have opened 165 Nio Houses, 376 Nio Spaces, 441 Onvo stores, 420 Service Centers, and 93 Delivery Centers. In J.D. Power's 2026 After-Sales Service Satisfaction Study, Nio ranked first in after-sales service satisfaction among both premium brands and Chinese brands.
Since the inception of the rankings, Nio has consistently maintained this achievement, with our high-quality services gaining recognition from both users and the industry. Sales and service network: So far, the company has established 165 Nio Houses, 376 Nio Spaces, 441 Onvo stores, as well as 420 Service Centers and 93 Delivery Centers.
In J.D. Power's 2026 Customer Service Index study for NEVs, Nio ranked number one among both premium brands and Chinese brands, maintaining its top position since the rankings were first introduced. Our high-quality services have earned widespread recognition from both the industry and users.
Regarding our charging and battery swapping network, as of now, we have deployed a cumulative total of 4,123 battery swap stations globally, along with over 30,294 superchargers and destination chargers. On August 7, Nio's 4,000th battery swap station, which is also its first fifth-generation station, was officially completed. The fifth-generation battery swap station is compatible with all models across the Nio, Onvo, and Firefly brands, covering everything from compact cars to full-size SUVs.
The operational and service efficiency of the fifth-generation stations has been significantly upgraded, further strengthening our external service and open operation capabilities. Meanwhile, leveraging our standardized and scalable energy operation system, we are actively expanding into value-added services such as electricity trading, continuously broadening and unlocking the commercial value of the battery swapping model.
Power Network: At present, the company has deployed 4,123 battery swap stations and 30,294 superchargers and destination chargers worldwide. On August 7, Nio's 4,000th battery swap station went live, marking the launch of its first fifth-generation station.
The fifth-generation station supports battery swaps for all models under the Nio, Onvo, and Firefly brands, covering a wide range of vehicle sizes from compact cars to full-size SUVs. With significantly enhanced operational and service efficiency, the fifth-generation station provides improved external services and supports open operations, leveraging standardized, large-scale power operations.
The company is also exploring value-added businesses, such as electricity trading, to unlock the commercial value of battery swapping. On the 23rd, Nio was named to Time magazine's list of the World's Most Sustainable Companies, becoming the only Chinese automaker on the list. We will continue to adhere to our pure electric development strategy, co-creating a more sustainable and brighter future with our users.
On July 23rd, Nio was named by Time magazine as one of the World's Most Sustainable Companies of 2026, becoming the only Chinese automaker on the list. We will continue to advance our BEV roadmap, shaping a more sustainable and brighter future with our users.
The automotive market competition has entered a new phase, with several core changes in the competitive landscape. The penetration rate of pure electric vehicles (BEVs) continues to rise rapidly, making BEVs the mainstream powertrain in the market. The industry is transitioning from a period of brand ambiguity to a period of brand credibility, with brand becoming a key consideration for consumers when choosing products.
Competition is also shifting from single-product comparisons to the final stage of competing on comprehensive systemic capabilities. For a long time, our persistent focus on premium positioning and building systemic capabilities has aligned with the latest industry trends. Nio is entering a new cycle of high-quality growth, and we are confident in achieving our established operational targets.
The market has entered a new phase of competition. The landscape is undergoing several important changes. First, with the rapid growth of BEV penetration, BEVs have become a mainstream powertrain in the market. Second, the industry is moving from a period of brand ambiguity toward greater brand clarity, with brand becoming an increasingly important factor in consumers' purchasing decisions.
Third, the final round of competition is shifting from product-level competition to competition based on comprehensive systemic capabilities. For years, we have remained committed to our premium strategy and have been building our systemic capabilities. This aligns us well with the industry's evolution and positions us for a new phase of high-quality growth. We are confident in achieving our operating targets.
Stanley will now present the financial results for the second quarter of 2026. Stanley, the floor is yours. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.
Stanley
Thank you, William. Let's now review our key financial results for the second quarter of 2026. Our total revenues reached RMB 32.1 billion, up 69.1% year-over-year and 25.9% quarter-over-quarter. Vehicle sales were RMB 29.1 billion, up 80.1% year-over-year and 27.5% quarter-over-quarter.
The year-over-year growth was mainly due to increased deliveries and a higher average selling price driven by a more favorable product mix. The quarter-over-quarter increase was driven by higher deliveries. Other sales were RMB 3.1 billion, up 7.2% year-over-year and 12% quarter-over-quarter.
Year-over-year growth was driven by increased sales of parts, accessories, and after-sales vehicle services, partially offset by decreased sales of used cars and technical research and development services. The quarter-over-quarter increase was due to higher revenues from used car sales as well as sales of parts, accessories, and after-sales vehicle services.
Regarding margins, the vehicle margin was 18.5%, compared with 10.3% in Q2 last year and 18.8% in the previous quarter. The year-over-year improvement was driven by a more favorable product mix, while the vehicle margin remained stable quarter over quarter. The overall gross margin was 18.4%, versus 10% in Q2 last year and 19% in the previous quarter.
The year-over-year increase was mainly due to the improved vehicle margin, while the slight quarter-over-quarter decrease was primarily attributable to lower gross margins from weak sales, power solution provisions, and sales of parts, accessories, and after-sales vehicle services.
Turning to operating expenses, R&D expenses were RMB 2.1 billion, down 28.7% year over year and up 13.8% quarter over quarter. The year-over-year decrease was driven by lower personnel costs in R&D functions due to organizational optimization, reduced design and development costs across different development stages, and improved operational efficiency.
The quarter-over-quarter increase was mainly due to incremental design and development costs for new products and technologies, as well as increased personnel costs in research and development functions. SG&A expenses were RMB 4.4 billion, up 11.6% year over year and 22.5% quarter over quarter.
The year-over-year increase was mainly driven by increased sales and marketing activities associated with new product launches. The quarter-over-quarter increase also reflected heightened sales and marketing activities related to new product launches, as well as higher personnel and related costs for marketing functions and share-based compensation for general corporate functions.
Loss from operations was RMB 0.3 billion, down 92.9% year over year and up 12.4% quarter over quarter. Excluding share-based compensation expenses, adjusted profit from operations was RMB 0.2 billion. The net loss was RMB 0.5 billion, representing a decrease of 89.4% year over year and an increase of 59% quarter over quarter.
Excluding share-based compensation expenses, adjusted net profit was RMB 26.1 million. Furthermore, our positive operating cash flow grew substantially, and we achieved positive free cash flow. Our cash position strengthened further, with total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits amounting to RMB 56.7 billion.
That concludes our prepared remarks. For more information and details on our unaudited second-quarter financial results, please refer to our earnings press release. I will now turn the call over to the operator to begin the Q&A session. Operator, thank you.
Operator
Thank you. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2. For the benefit of all participants on today's call, please limit yourself to two questions; if you have additional questions, you may re-enter the queue. Your first question comes from Bin Wang with Deutsche Bank.
Bin Wang
Thank you. My question concerns the sustainability of order flow for your ES8 and ES9 SUVs. We have observed that in the premium ACV market, some of your competitors' models only maintain strong sales for a few months. Could you explain why this is the case and how your new models differentiate themselves to face competition in the high-end premium ACV market? Thank you.
William Lee
Alright, thank you, Bin Wang. Demand for our flagship models, the ES9 and ES8, remains very strong. In August, we delivered 10,999 units of the ES8, approaching 11,000 units. Over the past 11 months, we have delivered 140,000 units.
In September, we will definitely reach the milestone of 150,000 deliveries. This means that within a year, our total deliveries will exceed 150,000 units, indicating that demand remains very robust. As I have mentioned before, in China's automotive industry, product iterations happen so quickly that it is rare for a car model to sustain strong sales over time.
The all-new ES8 has broken this industry trend, becoming a model with sustained strong sales. Currently, demand remains very strong. Thank you for the question. Regarding our new flagship models, including the ES8 and ES9, they will continue to see strong demand, particularly for the ES8.
In August, we delivered approximately 10,999 units, and over 11 months, we have delivered more than 140,000 ES8s. In September, we are set to reach our next milestone of 150,000 deliveries, meaning that in less than a year since its launch, cumulative deliveries have surpassed 150,000 units.
Therefore, demand for these models is quite strong. As previously discussed, new products in the Chinese automotive market are iterated and introduced rapidly, making it normally difficult for a new model to maintain its popularity and market attention. However, the ES8 may be the first model to break away from this market trend.
Regarding our tech flagship SUV, the ES9, demand has remained very strong since its launch and through to current deliveries. For our Horizon Edition and Signature Edition, the current waiting period is still over three months, approaching four months. Demand remains very strong. Looking at the data, if we compare August with July...
In July, we had some orders backed by refundable deposits. In August, however, we did not have such deposit-backed orders; instead, our new orders showed significant growth compared to July. Therefore, we remain very confident in the sustained strong sales of the ES9.
Regarding our flagship executive SUV, the ES9, it has also seen strong demand since its launch, especially for the Horizon Edition and the Signature Edition. Currently, customers placing an order will need to wait three to nearly four months to take delivery of their new vehicle.
Looking at the ES9 sales figures for July and August, I believe we were still working through pre-orders in July. However, comparing incremental orders between the two months, we actually saw growth from July to August. Therefore, we remain confident in the sustained popularity and demand for the ES9.
For our ES9, more than three-quarters of users are new customers from outside the existing Nio community. This indicates that the brand's crossover appeal is very significant. It is also worth noting that around 75% of ES9 users are new buyers from outside our established user base, demonstrating that the ES9 has successfully reached a broader audience.
I attribute this success to several factors. First is our technological leadership. From the perspective of innovation, the ES9 features dozens of industry-first technologies and leads its class in various technical aspects. This technological innovation serves as a solid foundation for our product competitiveness.
There are several reasons for the popularity and demand for the ES9. The first is technological innovation. On the ES9, we have debuted numerous industry-first or industry-leading technologies. This innovation remains a key driver of our product's competitiveness and differentiation.
Second, our product definition precisely meets the needs of families in the premium segment, as well as users who balance business and family requirements. We have addressed both their emotional and functional needs, resulting in very high user satisfaction.
The product definition has precisely catered to the needs of users in the premium segment, especially those buying the car for both business and family purposes. Our vehicles meet both their emotional and functional expectations, and users have spoken highly of the product.
Third, our charging and battery swapping network, along with our after-sales service system, provides a systematic advantage that is difficult for competitors to replicate. According to recent reports on energy efficiency, our after-sales service has ranked first among new energy vehicle brands for three consecutive periods.
Furthermore, in J.D. Power's 2023 study on after-sales satisfaction, we ranked first among both luxury brands and Chinese brands. We have maintained this top position for several years, highlighting that service experience is crucial for the premium market.
The third factor is the holistic and unique experience enabled by our charging and swapping network as well as our after-sales services, which constitute a systematic capability difficult for competitors to replicate. According to recent studies on aftermarket satisfaction for new energy vehicles, we have conservatively topped the rankings for three consecutive periods. Additionally, in J.D. Power's recent research on post-market satisfaction for new energy vehicles, we have ranked first for several years in a row.
Thus, for the premium segment, service-centric and after-sales experiences are very important. Finally, another critical point, which I have mentioned multiple times, is that the Chinese new energy vehicle market is transitioning from a period of brand chaos to a phase of brand clarification.
In recent years, consumer car-buying decisions have shifted from comparing technical specifications to prioritizing brand selection. We have established strong brand equity in the premium pure electric vehicle (BEV) market. There is now a broad market consensus that for consumers looking to replace their current BBA (Mercedes-Benz, BMW, Audi) vehicles with a high-end pure electric car, Nio is the preferred choice.
Regarding the factors influencing our Nio users' purchasing decisions, brand consideration now accounts for over 30%. This validates that Nio has established a deeply rooted brand image in the premium market.
As previously mentioned, the entire automotive market is shifting from a period of brand ambiguity to one of brand clarity. Previously, users' purchasing decisions were largely based on product specifications, but now they are primarily driven by brand.
In this context, Nio has established a solid foothold and clear brand awareness in the premium battery electric vehicle (BEV) market. Many users naturally view Nio as their go-to choice when replacing existing Mercedes-Benz, BMW, or Audi vehicles.
For those seeking a premium BEV model, Nio is also their top choice. Our analysis of existing new users' purchasing decisions reveals that brand reputation and awareness account for more than 30% of their decision-making process. This further proves our solid position in the premium BEV market.
Looking at terminal sales data, the average transaction price for the Nio brand in the Chinese market reached RMB 406,000 in Q2, surpassing traditional luxury brands (BBA) and ranking first among mainstream premium brands. In July, the average transaction price for the Nio brand further increased to RMB 430,000.
Further examining data from the Insurance Association, the average selling price of the Nio brand in Q2 was RMB 406,000, significantly higher than that of Mercedes-Benz, BMW, and Audi, ranking first among all mainstream premium brands. In July, the average selling price for the Nio brand exceeded RMB 430,000.
We believe that the scarcity and competitiveness of our brands will serve as a crucial long-term foundation for our three brands to compete in the market. Thank you, Wang Bin.
Wang Bin
Thank you.
Operator
Your next question comes from Tien Tsao with Morgan Stanley.
Tian Cao
Hi, this is Tim from Morgan Stanley. Thank you for taking my questions, Dan. Congratulations on the third consecutive profitable quarter. I have two questions. The first one concerns both brands. Compared to the robust growth of the Nio and Firefly brands, we have observed that customer conversion rates and order momentum for these brands have been relatively moderate since launch.
I would like to understand the progress in refining and adjusting customer incentives within your sales strategies, and what further changes management plans to implement to effectively improve momentum for both brands. That is my first question. Thank you.
William Lee
Regarding the team... uh, the competition in the market where Onvo operates is indeed much more intense. Compared to Nio and Firefly, Onvo is participating in a highly competitive landscape, with significantly more brands and car models involved.
If we look at the achievements Onvo has made since its brand launch, it has actually performed very well, particularly when viewed from the perspective of its specific market segment. Thank you for the question. It is true that Onvo operates in a more competitive market than Nio and Firefly, where the intensity of competition, in terms of both the number of brands and the number of models, is much higher.
However, if we examine its overall performance since launch, especially within its specific segment and market, it has made significant progress and achieved notable results. Regarding the average selling price, as everyone knows, the broader Chinese passenger vehicle market faced substantial challenges in the first half of this year. Nevertheless, the average transaction price for the Onvo brand exceeded RMB 240,000, representing considerable year-over-year growth.
In fact, only eight brands in China achieved growth in both sales volume and average selling price during the first half of this year, and Onvo was one of them. From this perspective, its average transaction price has surpassed some traditional luxury brands. Therefore, as a high-quality family-oriented car brand, Onvo has established a solid foundation in terms of brand building.
In terms of the average selling price of Onvo products, as we all know, the passenger vehicle market in China faced significant challenges in the first half of this year. Despite these challenges, Onvo still achieved an average selling price of RMB 240,000, marking significant year-over-year growth.
In the first half of this year, only eight brands in China's automotive market managed to achieve increases in both sales volume and average selling price, with Onvo being one of these eight. Thus, in terms of average selling price, Onvo is outperforming some traditional luxury brands.
Therefore, if we view Onvo as a premium family-oriented brand, it has established a strong baseline from a brand definition perspective. Onvo's products demonstrate strong comprehensive competitiveness. If we look at its conversion rate from sales leads to orders, it is leading the industry.
In other words, once users are exposed to Onvo's products, the conversion rate for purchasing our vehicles is relatively high. This also highlights that our primary challenge remains brand awareness. Currently, Onvo's brand awareness is comparable to where Nio stood five to six years ago.
Therefore, moving forward, we aim to increase exposure to the Onvo brand through more proactive measures, such as cross-industry collaborations, offline events, and deep engagement with communities. This is currently our main operational objective.
In terms of overall product competitiveness, we have seen solid progress and established a strong foundation, particularly evidenced by a healthy conversion rate from self-generated leads and opportunities to final orders. This indicates that when users become familiar with the brand and its products, they are more likely to place an order for Onvo vehicles.
Currently, the main challenge for the Onvo brand is overall brand awareness, which is roughly comparable to Nio's level from five to six years ago. Consequently, our focus is on expanding brand awareness and popularity through various collaborations, offline activities, and targeted community engagement.
Our initiatives include accelerating the rollout of Sky Stores shared by Nio, Onvo, and Firefly, thereby strengthening our sales network. This will allow the Onvo brand to better reach family users in third- and fourth-tier cities. The second action we are taking is to continue rolling out our Sky Stores, where we can house the Nio, Onvo, and Firefly brands under one roof.
This enables us to further expand our sales network and introduce the Onvo brand to more users in lower-tier cities. Thirdly, we will continue to launch new products to serve a broader base of family users. Throughout this process, we will maintain Onvo's positioning as a high-quality family vehicle brand.
We will not enter the ultra-low-end market; instead, we will balance sales volume with gross margins. Overall, we believe there is a gap in the Chinese market for a brand positioned like Onvo—comparable to the premium product lines of traditional automakers like Toyota and Volkswagen. We see this as a significant opportunity for Onvo.
The third action is to introduce new Onvo products to reach a broader family user base. Meanwhile, we will maintain our positioning as a premium, high-quality, family-oriented brand and will not aggressively enter the entry-level segment.
We will strike a balance between sales volume and vehicle gross margin. In the current Chinese automotive market, we identify a vacancy for a brand comparable to the upscale product lines of Toyota or Volkswagen that caters to family users. This represents a key opportunity for Onvo to build its presence in this specific segment. Thank you.
Tien Tsao
Thank you very much for sharing the details. My second question is a quick one. I just want to know if management can share information on next year's new model refresh and the key launch milestones for the Neo, Firefly, and the third brand in the group. That’s all. Thank you.
William Lee
Uh, thank you, Tim. From the perspective of future brands, certainly, for our 5-series and 6-series products, there will be some new product plans. The market is likely already aware of this. As for Onvo, we will launch a strategic new product next year, which will further enrich our product lineup.
Regarding Firefly, we are maintaining a single-model strategy for the Firefly brand. However, we will continue to introduce special editions and iterate on technology. Overall, Firefly is somewhat like the iPhone; we will continuously roll out new special editions within the same product framework.
Thank you for the question. Regarding new brands for next year, we will be introducing new products from the 5-series and 6-series product lines. I believe the market is already aware of some of our latest plans. For the Onvo brand, we will introduce a major strategic new product next year, which will help enrich our existing product lineup.
And for the Firefly brand, we will maintain this single-model strategy while rolling out special editions and technology upgrades. So for Firefly, it is a bit like taking the iPhone approach, where the core product remains the same but with new additions. Thank you, Tim.
Tien Tsao
Thank you very much.
Operator
Your next question comes from Paul Gong with UBS.
Paul Gong
Hi, William, thanks for taking my question. My first question is regarding your vehicle gross margin outlook for the next two quarters amid ongoing cost inflation. We are aware that memory costs continue to rise, and I would like to hear your thoughts on how this impacts vehicle gross margins. Thank you.
Stanley
Hello, Pao. Indeed, the pressure on the cost side has been quite significant this year. As we mentioned previously, starting from March this year, costs for memory, bulk commodities, and batteries have all risen. Looking at the entire second quarter...
Uh, compared to the end of last year, the average cost per vehicle has increased by approximately RMB 14,000. Therefore, this has placed significant pressure on our gross margin. Thank you for the question. It is true that since the beginning of this year, the cost structure of the automotive industry has been under pressure.
For the company, we have been facing pressure from rising material costs, including memory chips, batteries, and other bulk commodities. Comparing the costs in Q2 with those in late Q4 of last year, the average cost increase is around RMB 14,000 per vehicle.
Correct. Of course, the company also undertook significant efforts in Q2 to stabilize our gross margin and hedge against the pressure of rising costs. This included maintaining price stability across our three brands; we did not simply lower prices to boost sales volume.
Additionally, on the cost side, we implemented measures such as supply chain optimization and commercial negotiations. Overall, we basically achieved a relatively stable vehicle gross margin of 18.5%.
Also in Q2, we took a series of measures to stabilize our vehicle margins amid rising cost pressures. As previously mentioned, we adopted a very stable pricing strategy for our products and did not lower prices in exchange for sales volume.
Secondly, on the supply side, we worked with the supply chain to implement a series of optimization measures and engaged in commercial negotiations. With these combined efforts, we managed to stabilize our vehicle gross margin at 18.5% in Q2.
Looking ahead to the second half of the year, we see a risk of continued increases in material costs. We estimate an average additional cost of RMB 2,000 to 3,000 per vehicle. The company will continue to take corresponding measures, with the overall goal of maintaining the gross margin in Q3 and Q4 at a level similar to Q2.
Going into the second half of the year, we expect material costs to continue to rise by another RMB 2,000 to 3,000 on average. However, we will also take a series of countermeasures to mitigate these risks. In Q3 and Q4, we aim to stabilize our gross margin at the same level as in Q2.
Paul Gong
So my second question is: despite all this cost pressure, you have made significant improvements in profitability over the past year. What gives management the confidence that these improvements are sustainable rather than cyclical?
Stanley
Uh, yes, indeed. This is a comprehensive measure. On one hand, as William just mentioned, the entire automotive market has entered a phase of brand competition. As we also noted, sales for our future brand models, the ES8 and ES9, remain very stable.
Furthermore, their market share in the premium segment is very high. These two models account for a significant portion of our portfolio, and their gross margins exceed 20%. Therefore, they serve as the cornerstone of our overall gross profit.
Thank you for the question. We need to take comprehensive measures in this regard. First, as William mentioned, automotive competition in China is shifting towards being more brand-driven. For our new brand, the ES9 and ES8 are still seeing pretty stable demand and hold a significant market share in their respective segments.
These two models make major contributions to our product mix as well as vehicle margins, with both achieving over 20% vehicle margin, forming the foundation for our overall performance. Secondly, we will continue to optimize our cost structure, refine our product definitions, and work with our partners to identify cost-reduction measures.
In fact, starting from the past few quarters, we have been deeply integrating what we internally call the 'atomized' capabilities of our R&D and supply chain. We have identified many opportunities in this area and will continue to pursue these efforts going forward.
The second point is to keep rolling out optimizations to our cost structure by making more accurate product definitions and working on cost-reduction opportunities together with our supply chain partners. These are efforts we have been focusing on over the past several quarters.
Internally, we have been decoupling and analyzing our R&D and supply chain capabilities at a granular level, identifying opportunities for continuous cost reduction. We will continue to maintain this momentum.
William Lee
The pressure in China's automotive market is significant. However, if you look at the quality of the company's future growth, it remains very high. As Dan just mentioned regarding the sustainability of our long-term profitability, our sales volume increased by 67% in the first half of this year, but our revenue growth outpaced the volume growth.
Our revenue increased by 86% year-over-year. If we look at the total gross profit amount, it surged by 282% year-over-year. This growth rate was even faster than that of revenue. This achievement was realized despite the sharp rise in costs for raw materials and memory chips this year.
As Sanli just mentioned, our average cost per vehicle in Q2 increased by RMB 14,000 compared to the end of last year. In the second half of this year, it is expected to increase by another RMB 2,000 to 3,000, reaching between RMB 16,000 and 17,000 compared to the end of last year. Nevertheless, we remain confident in achieving rapid growth in our total gross profit.
This fully demonstrates our company's competitive strength across the entire system, from technology and product development to supply chain management, sales, and brand positioning.
As mentioned, the Chinese automotive industry has been under cost pressure. However, despite these challenges, the company has still achieved high-quality growth. As Stanley shared, we have taken various measures to secure the long-term and sustainable growth of our business.
I would also like to share some figures. In the first half of this year, our sales volume increased by 67% year-over-year, while our total revenue grew by 86% year-over-year, outpacing the volume growth. In terms of gross profit, it surged by 282% year-over-year, significantly faster than our revenue growth.
This performance was achieved amid challenges on the supply side, including rising raw material costs. As mentioned, in Q2, the cost impact per vehicle was approximately RMB 14,000 compared to late last year. In the second half of this year, this impact is expected to increase by another RMB 2,000 to 3,000. This means that in the second half of this year, compared to Q4 last year, our cost structure will bear an additional burden of RMB 16,000 to 17,000.
Despite this backdrop, we still aim to achieve steady growth in our gross profit. This further demonstrates our systemic capabilities and competitiveness in technology, products, supply chain, sales, and brand management. Thank you, Paul.
Paul Gong
Thank you very much. We appreciate the update and congratulate you on your achievements. Thank you.
Operator
Your next question comes from Niklay at JPMorgan.
Niklay
Thank you for taking my question. My first question relates to the strong operating cash flow and free cash flow generation in the first half. Could you remind us of our cash burn, including CapEx and R&D? What level of free cash flow can we anticipate by year-end, given our current strong position?
Could you also outline where we plan to invest or allocate our cash in terms of CapEx and R&D? That is my first question. Thank you.
Stanley
Uh, thank you, Nick. Let me break this down into a few parts. First, regarding our capital expenditure (CapEx) for this year, we expect to maintain a level similar to last year. As previously communicated, the full-year CapEx will be around RMB 6 to 7 billion.
The primary use of these funds will be for R&D investment in our vehicle models and the expansion of our sales and service network. Investment related to factories will be relatively lower this year.
Well, thank you for the questions. I will answer your question through several major aspects. The first is regarding CapEx for this year; we expect our full-year CapEx to be relatively flat compared to last year, roughly RMB 6 to 7 billion per year.
Such investment is mainly used for product research and development as well as the rollout of our sales and service network, with not much investment going into capacity and factory sides. Secondly, we will continue to aggressively build out our charging and battery swapping network. Our target for this year remains 1,000 new battery swap stations.
Of course, what differs from before is that since we launched our Power Swap Partner plan in 2024, we have made significant progress this year. We have collaborated with over 40 local state-owned enterprises and financial institutions across 25 provinces and municipalities nationwide.
From the current perspective, the funding for our full-year charging and swapping network construction plan is entirely provided by our partners. And the second point is that we will continue to roll out and expand our charging and swapping network this year. We still plan to build 1,000 new power swap stations, but different from previous years, in 2024 we introduced the Power Swap Partner plan.
Through this plan, we aim to collaborate with various partners for the construction of our charging and swapping infrastructure. This year, we have made major progress in this initiative, partnering with over 40 state-owned enterprises, platforms, and financial institutions across 25 provinces and cities in China to construct our charging and swapping infrastructure.
For this year, we expect all newly built infrastructure to be funded by our Power Swap Partners. Thirdly, our BaaS (Battery as a Service) model is gaining increasing recognition from users. The battery assets associated with the BaaS model have also received recognition and support from financial institutions and various partners.
Therefore, from a financing perspective, various financing channels were essentially fully opened up in the first half of this year. As you can see, Nio's future liabilities decreased from RMB 16 billion at the beginning of the year to less than RMB 15 billion by the end of the second quarter. Thus, despite an increase in deployments, the absolute amount of liabilities has actually decreased.
This is also crucial for improving and supporting our future cash flows, particularly regarding the collection of outstanding receivables. Furthermore, our Battery as a Service (BaaS) business model is gaining increasing recognition from users. This trend is also strengthening support for our battery asset management operations and the associated entity from financial institutions and various partners.
In the first half of this year, Wayno, our battery asset management subsidiary, made significant progress in fundraising across multiple channels. Meanwhile, the amount due from the battery asset management company decreased from over RMB 16 billion earlier this year to less than RMB 15 billion by the end of Q2.
Given that we are expanding both the user base and the scale of our battery asset management business, the absolute increase in receivables remains proportionally reasonable. Therefore, overall, with the continuous growth in sales volume and the gradual improvement in our operations, our primary objective for Q3 and Q4 remains focused on cash flow generation.
Our goal continues to be achieving positive operating cash flow and free cash flow. Overall, against this backdrop, we expect our total cash reserves to continue increasing in Q3 and Q4.
With the increase in sales volume and ongoing efforts to improve operational performance, we expect to maintain positive free cash flow and operating cash flow in Q3 and Q4. Consequently, we believe our cash position will continue to strengthen in the second half of this year. Thank you, Nick.
Niklay
Thank you. My second question relates to autonomous driving. The market is indeed highly competitive, with every peer offering autopilot functions or features. From a user's perspective, how do we differentiate our product offerings from competitors, ranging from premium to entry-level models?
Additionally, given the current high adoption and penetration rates, will we consider alternative payment options in the future, such as pay-as-you-go or subscription models? Thank you, Nick.
William Lee
Regarding our advanced driver-assistance systems (ADAS), this year has demonstrated the advantages of our technological roadmap, which integrates world models, closed-loop reinforcement learning, and collective intelligence. Notably, despite our cloud-based training compute investment being significantly lower than that of our peers, we have achieved excellent user experience outcomes. This fully validates the effectiveness of our technical approach.
Thank you for the question. This year, the market has begun to recognize the benefits and advantages of our overall architecture, which features world models, closed-loop reinforcement learning, and collective intelligence. Particularly considering that our actual investment in computing power for training autonomous and smart driving functionalities is relatively modest compared to peers, achieving such a superior user experience with our latest release further proves the strengths of our technology roadmap.
On June 18 this year, we simultaneously pushed the new version to over 700,000 users across several brands and platforms. This demonstrates the advanced nature of our technical architecture.
I would also like to share some data. For users of models equipped with our proprietary chips, such as the P One X using the 9031X chip and the Cedar series, nearly 60% (specifically 58%) of these users engage intelligent driving assistance for more than half of their daily mileage.
And also I would like to share some numbers with you. For the Cedar user, that's our third generation platform equipped with NX1931 smart driving trip, where among this group of users around 58% of them have been engaging a smart driving functionalities for more than half of their trips.
Regarding the subscription model, we currently offer a five-year free subscription to new car buyers for both Nio and Onvo brands at the time of launch. However, for used car buyers or users whose five-year period has expired, different terms apply.
For example, if the original owner sells their vehicle, we provide subscription services to these subsequent used-car owners. The current monthly subscription fee is RMB 380, and the penetration rate is approaching 20%. This positively reflects the competitiveness of our product and user experience.
Although the current base of paying users is relatively small, generating tens of millions of RMB in subscription revenue this year, we believe that as the user base grows, subscription revenue will become a significant source of service income for our company in the long term.
And regarding the business model for the smart driving service, well, right now for the new new users and humble users, we offer them a five year complementary subscription to our smart driving capabilities and systems. But for the use of car users or when they expire on this five year complementary service, they will have to definitely pay for the subscription.
For the use of car users, they are paying 300 and ATR MB per month for the smart driving subscription where we now see a penetration rate of around 20%. Among this use the car users, this is also a pretty sizable amount showing also the competitiveness of our product and experiences.
And of course right now this is just a small user base. But for the longer term, we believe that this will also be a quite sizable source of a revenues for our business. Right now, every year, the revenue from that part of business is around several thousands of millions of RMB. Thank you.
Niklay
Thank you.
Operator
Your next question comes from Ming Sun Li with Bank of America.
Ming Sun Li
Hi William, this is Ming. I have two questions. The first relates to your fifth-generation battery swap station, which features a compact expansion and can accommodate all three of your brands. Could you provide more details on the CapEx per station and the maintenance costs compared to your previous-generation swap stations?
Additionally, you are now opening your battery services to other automotive OEMs. Could you elaborate on your pricing strategy and your unique economic model? Thank you. That concludes my first question.
William Lee
OK, regarding the fifth-generation swap station, we have adopted a flexible solution in terms of compatibility. This means that future models from Onvo and Firefly, across different sizes, can all use the same swap station. In terms of cost, the fifth-generation station represents a further reduction from the fourth generation. Specifically, for a single station...
...in terms of construction and material costs, there has been further optimization. Overall, excluding batteries, the construction cost for the high-voltage power installation of a fifth-generation station is approximately RMB 1.4 million, which is about RMB 100,000 lower than the fourth-generation station.
Thank you for the question. Regarding the fifth-generation swap station, we have adopted a flexible design that allows the station to accommodate all models from Nio, Onvo, and Firefly. Essentially, it is compatible with cars of various dimensions and sizes. In terms of cost, we have achieved continuous improvements over the fourth generation, optimizing and reducing material costs.
As for the cost per station, if we exclude the batteries as well as all costs related to high-voltage power supply and energy infrastructure, looking solely at the station itself, the cost is around RMB 1.4 million per station. This is approximately RMB 100,000 cheaper than the fourth generation.
In terms of operations, there are two aspects. First, we are continuously optimizing the operations of all our swap stations. Specifically, regarding labor efficiency for on-site staffing, as our swap station failure rates decrease and our software capabilities improve, overall labor efficiency has increased by 50% compared to the beginning of last year.
Secondly, regarding the fifth-generation stations, although the failure rate is still in a ramp-up phase, current performance indicates an improvement over previous generations during the same period. Technologically, it is designed to perform better than earlier models. Therefore, we believe the operational efficiency of the fifth-generation stations will surpass that of previous generations.
In terms of swap station operations, we have made continuous improvements in labor efficiency supporting station operations. We have also enhanced the first-time success rate of battery swaps and software features. Compared to early last year, performance has improved by 50%.
Of course, as the fifth-generation stations are new to the field, we are still in the initial ramp-up phase. However, compared to previous generations during the same timeframe, we have already observed a significant improvement in the success rate of power swaps at fifth-generation stations. Overall, we believe that the operational efficiency of this generation will be substantially better than that of its predecessors.
Regarding the third point on external partnerships, we signed agreements with several OEMs over the past two years to establish a battery swapping alliance. Currently, implementation projects are underway, and communications and negotiations are continuing, driven by the development of Robotaxis over the last two years.
Robotaxis and battery swapping are highly complementary, with swapping serving as critical infrastructure support. These efforts are ongoing. Regarding the cooperation and charging framework you mentioned, we plan to adopt an access fee model. However, specific details remain subject to final implementation, and we will disclose them once the projects are officially launched.
Regarding these external partnerships, as the new energy vehicle industry enters a new stage of development, more market participants are recognizing the advantages of battery swapping. Consequently, an increasing number of OEMs are seeking to join this ecosystem. From a future energy perspective, this helps us amortize our operating costs.
Standardizing battery packs helps improve battery efficiency and significantly contributes to cost reduction. The third point concerns our partnerships and alliances with other OEMs regarding battery swapping; we signed agreements with several OEMs to form this battery swapping alliance a few years ago.
We continue to maintain ongoing communications and collaborate on various projects. Meanwhile, as the Robotaxi sector gains popularity, we see battery swapping stations and services in general providing strong infrastructure support for the Robotaxi business.
We are also exploring opportunities with our partners from this perspective, focusing on the cooperation framework and service pricing models. We basically intend to charge an admission fee for access to our battery swapping network.
However, further details are still under discussion and will be finalized upon actual project implementation. For the entire new energy vehicle industry, we are entering a new phase where more stakeholders recognize the benefits of battery swapping, and more OEMs are embracing the concept of swappable vehicles to leverage these advantages.
With more partners joining this initiative, we can optimize and amortize our operating costs. By standardizing battery packs, we can also improve efficiency and optimize our cost structure. Thank you.
Ming Sun Li
Thank you, Stanley. My second question relates to your operating expenses. We noticed that your sales and marketing expenses were higher in the second quarter. Was this due to the launch of more new models during the quarter? Could you provide more guidance on your 2026 operating expenses? Thank you.
Stanley
OK, let me address this in two parts. First, regarding our R&D expenses: as we have communicated in previous quarters, we intend to maintain R&D spending at approximately CNY 2.5 billion per quarter. We will dynamically adjust the level and pace of this expenditure based on the progress of our R&D projects and business developments. Therefore, for each quarter of 2026, we expect fluctuations around this baseline level.
Thank you for the question. I will break down the information into two categories of overall expenses. The first concerns R&D expenses. As previously mentioned, our non-GAAP R&D expenses will remain relatively flat at around CNY 2.5 billion. We will make dynamic adjustments based on the actual cadence and pace of our projects and business operations. However, for this year, R&D spending is expected to average CNY 2.5 billion per quarter.
Of course, investors may notice that our R&D expenses have decreased to some extent compared to our historical investment levels and those of some competitors. However, I believe our R&D efficiency is actually higher. This can be attributed to two factors. First, we remain focused on the pure electric vehicle route, rather than spreading resources across...
...multiple pathways such as hybrid and extended-range electric vehicles. This focused approach allows our R&D efforts to be more concentrated, enabling core technologies to be reused across different brands and vehicle models, thereby enhancing efficiency. Second, since the implementation of our CPU management mechanism last year, the efficiency of our internal R&D systems and organizational structure has been continuously optimized.
In summary, despite this level of investment intensity, we are still able to ensure our competitiveness in core technologies and key products. Regarding R&D expenses, some may compare our current spending with our previous levels or with competitors, noting that our expenses are relatively lower.
However, we must also pay close attention to the utilization of these expenses and the efficiency of our R&D activities. First, Nio has remained committed to the battery electric vehicle (BEV) roadmap. This allows us to focus more intently on technologies and products related to the BEV roadmap, without diluting our efforts across BEV, PHEV, or EREV segments.
Secondly, by rolling out this CPU mechanism internally, we can better measure and improve the efficiency of our R&D systems and organizations. Thus, even with a relatively moderate investment in R&D activities, we can maintain our leadership and technological advancements in both products and technology.
From the perspective of SG&A (Selling, General, and Administrative expenses), let's first look at the ratio of SG&A to sales revenue. On a non-GAAP basis, this ratio was approximately 13% in both the first and second quarters, which aligns with our expectations. Secondly, in the second quarter, particularly regarding selling expenses, there were significant one-time investments.
This is because most of our new product launches for the year were concentrated in the second quarter, including the ES9 and the model updates for Onvo. These one-time impacts affected our R&D... [Note: Context suggests impact on SG&A/Sales, but text cuts off referring to R&D/Expenses]
This SGA expense resulted in approximately RMB 500 million in growth. Therefore, we do not expect such significant one-time impacts to recur in the following two quarters. Looking ahead to the outlook for the third and fourth quarters, our control target for SGA remains to keep non-GAAP SGA as a percentage of total revenue between 10% and 11%. From the current perspective, this is a controllable and achievable goal through our efforts.
And regarding SG&A expenses, if we look at SG&A as a percentage of sales revenue in the first and second quarters under non-GAAP standards, it was around 13% in the first half. In the second half, we see a slight increase in sales expenses, mainly driven by specific costs as most of our new products for this year were launched in the second quarter, including our Yes Night model and some facelift models for Humble.
So that one-off impact was roughly RMB 500 million, which mainly occurred in Q2. We do not expect such a one-off impact on sales expenses in the second half. Regarding the second-half outlook for SG&A expenses as a percentage of sales revenue under non-GAAP standards, we expect it to be around 10% to 11%. This is both a controllable and an achievable target for us. Thank you, Ming.
Operator
Your next question comes from Jing Chang with CICC.
Jing Chang
Thank you for taking my question. Time is limited, so I have only one question. We know that our Senior Vice President, Mr. Ren Shaoqing, has founded and embarked on an AI startup in which we have made a strategic investment. What are the long-term cooperation potentials between this new company and ours, and what long-term value can it bring to our company?
William Lee
Yes, as everyone has seen from the news, Mr. Shaoqing, the head of our autonomous driving division, will start a venture in the field of physical AI. He will support this venture as a strategic shareholder. At the same time, Mr. Shaoqing will continue to serve as the head of our future intelligent driving department, responsible for the technical direction and long-term strategy of autonomous driving, while also participating in autonomous driving-related work.
We believe that this arrangement allows us to maintain strategic investment in embodied intelligence and physical AI while focusing on our core business. It will not affect our P&L and allows us to utilize our resources effectively. Additionally, it helps attract more external strategic shareholders and investors. We consider this to be a favorable arrangement.
Thank you for the question. Yes, Mr. Yan Xiaoqing, the head of our smart driving department, is now starting a new business regarding physical AI and embodied intelligence. Nio is supporting his business as a strategic shareholder. Meanwhile, he will still serve as the head of our smart driving department, responsible for the overarching technology as well as the long-term tech roadmap for our products.
We also think that such an arrangement is necessary and meaningful. Currently, Nio is staying focused on our core business. Meanwhile, through this startup by Mr. Ren, we can keep track of the latest developments in physical AI and embodied intelligence without diluting our focus or affecting our P&L.
At the same time, such a startup can help make full use of our resources as well as attract external strategic shareholders and investors. So we think this is a good arrangement. Additionally, I would like to add that talent competition in the AI sector is very intense. We believe that using a startup structure is more effective in attracting the best talent in the industry, thereby ensuring the success of this venture.
In the long term, we believe there will be extensive strategic and business cooperation between our company and this startup focused on embodied intelligence. Also, as we all know, competition for AI talent in the realm of physical AI is quite intense.
Through this venture, we can better attract top-tier talent in the industry. This will also benefit the long-term development of both the venture and our AI-related business. In the long run, we anticipate significant strategic collaborations and projects between you and this AI venture. Thank you.
Jing Chang
Thank you.
Operator
Your next question comes from Yukon Ding with HSBC.
Yukon Ding
Thank you, Tim. Hi, Sally. My question is regarding your volume outlook for this year. I think your voice is breaking up. Could you please repeat your question? Thanks.
Yukon Ding
Yes, sure. We still can't hear you. Can you hear me now? Yes, much better. Hello. OK. Yes. To reiterate, my question is about the volume outlook for Q4 and 2027, given the potentially strong signal and the backdrop of new motorcycle launches next year.
William Lee
For Q4, we believe the overall market will recover. Our target is to achieve an average monthly delivery volume of over 40,000 units. From a mid-to-long-term perspective, we still aim for annual sales volume growth of 40% to 50%, based on our current product portfolio and sales capability deployment.
We expect the passenger vehicle market to recover in Q4 this year. Our target for Q4 is to achieve an average monthly volume of over 40,000 units. In the mid to long term, supported by our product lineup and sales and service network coverage, we expect annual volume growth of around 40% to 50%, which we aim to sustain over the long term. Thank you.
Operator
As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.
Roy Chen
Thank you again for joining us today. If you have further questions, please feel free to contact our IR team using the contact information on our website. This concludes the conference call. You may now disconnect your line. Thank you. Goodbye.
More details:NIO Inc IR
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