Nick Lai: [Foreign Language]
William Li: Thank you Nick. [Foreign Language]
Unidentified Company Representative: In this round of organizational optimizations, we have identified several principles because over the years of development, we have some low efficiency positions and jobs and also some duplicated roles and responsibilities. In this case, we have identified these low efficiencies or redundancies in the organization. We’ve improved the processes of lower efficiencies and we’ve also eliminated jobs and positions that are duplicated or are of low efficiencies. And also, in terms of the projects deferred or terminated, basically we look at the projects and their financial contributions. If they cannot bring any financial contribution in the coming three years, we will be thinking about deferring them or terminating them.
For example, if they cannot contribute to the gross margin or the P&L, they may need to be deferred or reconsidered. A quick example is regarding the in-house manufacturing of our batteries. We’ve identified that in the coming three years, bringing battery production in-house will not help us with the gross margin improvement. In this case, we have decided to defer the plan. We will still continue to do the in-house R&D of battery cells, battery materials, and battery packs. But we will outsource the manufacturing of the battery packs for better overall efficiency and performance. So for this round of optimization, we’ve done a detailed and thorough review and adjustments and also made the necessary adjustments based on the needs of the business and the resources of the entire company.
William Li: [Foreign Language]
Unidentified Company Representative: But in the meantime we will still make sure that we don’t miss our – will dilute our investment and resources for the high priority items for the coming two years. The first is the long-term investment for the core technologies so that we can still keep leading in terms of the product and the technologies. As mentioned earlier today, as the NIO Day 2023 we are going to unveil a brand new flagship model and this car will be equipped with a lot of state of the art technologies that are leading the entire automotive industry. And our second priority is the continuous development of our sales and service network. Recently we have enlarged the sales teams. We have also increased the number of the point of sales so that we can get ready for the more intense competition in the coming two years, because if we don’t make such preparations, we will not be navigating the intense competition.
An example is that in October in Shanghai, our sales volume has outnumbered that of BMW and Mercedes running on all power sources, including ICE cars as well as EVs. In cities from Jiangsu or Zhejiang provinces, we are also establishing a pretty solid foothold with a pretty significant market share. But when it comes to lower tier cities like 4th tier or 5th tier cities, we still have a long way to go. In cities where the EV infrastructure is not yet ready, we are also not outperforming those well-established brands. In this case, we need to continue to develop our sales and service networks. In terms of our sales performance in Zhejiang, Jiangsu and Shanghai, actually 50% of our sales volume is contributed by the sales in these three areas.
On the one hand, it shows that our products are well recognized in the highly competitive markets in these three places. On the other hand, it also means that we need to further enhance our brand awareness in the lower tier cities. And the third priority in the coming two years is to secure the on-time release of our NIO core products from the third brands. We have already made investments and the products of this third brand will be coming into the market very quickly in the coming two years.
William Li: Thank you, Nick.
Nick Lai: [Foreign Language] Thank you. It’s very clear. My second question is really about the [Indiscernible] sales performance and margin. And how to consider these two factors when it comes to the market competition and also maintain a 15% of the margin in 4Q and a relative target of let’s say 20% to 22% or the 2022 margin sometime to 2024 and beyond? Thank you.
William Li: [Foreign Language]
Unidentified Company Representative: Our strategy for the third quarter is pretty clear. That is to keep our prices stable. Earlier this year, in June we have adjusted our user benefits. Actually both our existing users and the new users were affecting this adjustment pretty well. So we may be the only company able to satisfy both existing users and the new users with a benefit of adjustments. And since then we have been keeping a pretty stable price strategy as we believe that it is beneficial to our brand image and also product competitiveness. And also users experience and benefits. As going into Q4 the price war steepens, the competition also gets more fierce. For many well established brands like our competitors BMW and Mercedes, they are also slashing prices pretty aggressively.
Even on their EV models the price reduction can be as high as 31%. But we still keep a pretty stable price amid this fierce competition. This is also reflected, this stable prices are also reflected in our improved vehicle margin. So our longer term strategy will be keeping our price stable while continuously improving our vehicle margin. In the meantime we will also improve our sales capacity, capability and efficiency so that we can bolster our sales volume. But this can take time and we will be staying patient. We will not realize or boost our sales volume at the cost of our product margin as this is not healthy for the longer run. Maybe Stanley can also add more information regarding the specific financial numbers.
Stanley Qu: Hi Nick. Our vehicle gross profit margin is 11 for Q3. And we are confident to achieve a higher margin in Q4 considering more production efficiency, lower price of lithium carbonate and also decreased part cost. Our target is also still kept at 15% for Q4. And from long run as an important project internally we have started to further improve our cost structure for NT2 products by optimizing design, improving supply chain and production efficiency and also business negotiation with our partners. As mentioned by William, our new brand keeps focus on premium market segment and we will keep product prices relatively stable. So combined all those factors together we believe our vehicle margin can be further increased to 15% to 18% in 2024. That’s the general guidance for vehicle margin.
William Li: [Foreign Language]
Unidentified Company Representative: And also looking at our previous – margin for Q3 [Indiscernible] we actually managed to build a deeper margin that stood at 21%. So for a much longer term we will also target actually a deeper margin [Indiscernible]
Nick Lai: Thank you.
Operator: The next question comes from Yuqian Ding with HSBC. Please go ahead.
Yuqian Ding: Thanks Tim. This is Yuqian Ding here. I got two questions. Maybe we roll it one by one. The first one is on the cash position. We noticed the cash balance increasing quarter-on-quarter. Other than the strategic investment and the convertible bond there is also still a 1 billion increase. Does that come from the improving operation? Can you shed a little bit more light on that?
Stanley Qu: Hi Yuqian Ding. This is Stanley. As the new product delivery wrap up in Q3 we achieved positive operating cash flow. Going forward if our sales continue to grow we are confident to realize healthy operating cash flow. So that’s for your first question. Yes.
