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Dragged into a slump by its MPV flop, what lessons has Li Auto learned?

Written by 36Kr English Published on   18 mins read

The Li Mega’s failure was a surprise for Li Auto, but it offered critical lessons for CEO Li Xiang and his entourage.

On March 1, after Li Auto’s launch of the Li Mega electric MPV, a group of the Chinese automaker’s investors gathered for dinner, where a vote of confidence was initiated. Of the more than 20 people present, almost everyone raised their hands, expressing their hopes that the Li Mega, as Li Auto’s first pure electric vehicle, would chart a new growth curve for the company.

The investors’ optimism was shared by Li Auto’s internal team. According to 36Kr, the company set a bold sales target of 800,000 units for 2024—more than double the previous year’s figures. Additionally, there were private discussions about an even more ambitious target of 850,000–900,000 units. Despite the car’s hefty price tag of around RMB 560,000 (USD 76,970), no one questioned its pricing. There were seemingly no doubts about Li Auto’s transition from extended-range to pure electric vehicles, nor concerns about the lofty sales targets.

In the past few years, Li Auto has consistently achieved notable results, securing its position among the top car manufacturers. Li Auto is renowned for its outstanding product definition, with its extended-range electric vehicles (EREVs) experiencing continuous sales growth. By the end of 2023, Li Auto sold nearly 380,000 vehicles, more than doubling its sales from the previous year and ranking first among new car manufacturers in terms of sales.

The company is also recognized for its stable operations, being one of the few new car companies to achieve net profit, and maintaining substantial cash reserves. Just three days before the Li Mega’s launch, Li Auto released its annual report, stating that, in 2023, the company’s revenue and cash reserves both exceeded RMB 100 billion (USD 13.7 billion), with a net profit reaching RMB 11.8 billion (USD 1.6 billion). This caused the stock price to surge, with the market value nearing USD 50 billion at one point.

Numerous long-term funds and individual investors jumped on the bandwagon at that time. An industry executive familiar with Li Auto even told 36Kr that Li Auto’s million-vehicle sales target was no longer a dream. According to Li Auto’s plan, sales are projected to reach 1.6 million units by 2025, achieving 100% growth for four consecutive years. This would almost replicate BYD’s growth in the new energy vehicle (NEV) sector.

However, things took a turn later: the Li Mega flopped in sales. After fulfilling accumulated orders, monthly sales plummeted to several hundred units. This not only disrupted Li Auto’s original sales rhythm but also affected the company’s overall pace. During the latter half of 2023, Li Auto’s factory in Changzhou saw highways around it frequently clogged with delivery vehicles. But 36Kr learned that, not only is there no traffic congestion this year, the early production line is sometimes not even fully occupied.

Promotional image of the Li Mega.
Promotional image of the Li Mega. Image and header image source: Li Auto.

Seeing sales deviate from expectations, someone suggested a price cut at a cadre meeting in early April, which was said to have angered CEO Li Xiang. But Li couldn’t resist reality. 36Kr learned that Li Auto’s newly released extended-range vehicles quickly accumulated about 40,000 units in inventory. Within less than a week, Li Auto announced price cuts across the board. At the same time, the originally planned annual sales target of 800,000 units was adjusted down to a little over 500,000 units.

Three new pure electric SUVs that were originally planned for release this year were also postponed to next year. The original plan for a 30% increase in personnel was replaced by layoffs. As for the stock price, within just one quarter, it had plummeted by 60%.

An investor, disappointed, told 36Kr that, even considering the risk that the Li Mega would not sell well, the slump in the company’s momentum was unexpected.

Yet, fluctuations in sales and market value are ultimately temporary gains and losses, with room for change and reversal. With this perspective, how then should the future of Li Auto be judged: is the Li Mega’s failure a fluke, or does it reflect deeper underlying issues within Li Auto? And, as a dark horse that has stood out on several occasions, can the qualities that once led Li Auto to success in the field of EREVs carry it over the current hurdles and reignite its growth?

What drives Li Auto’s growth?

On one occasion in July 2022, Li’s angry rebuke echoed through the corridors of the fifth floor of the R&D building at the headquarters situated in Shunyi, Beijing: “We’ve been targeted by the most aggressive company in the world, and they’re determined to kill us, and you think it’s fine. That’s just too stupid.”

The company Li was overheard alluding to is Huawei.

At that time, Huawei-supported Aito had just released the first-generation M7 model. After reviewing the product, Li Auto employees considered the M7 merely the EV equivalent of typical gasoline cars, dismissing it as uncompetitive. They began to slack off in studying M7’s sales tactics and visiting offline stores. For Li Auto’s employees, treating the Aito M7 as a competitor was indeed somewhat challenging. At that time, Li Auto was already selling 10,000 units a month with the Li One model and was pushing toward 20,000 units a month.

Promotional image of the Aito M7.
Promotional image of the Aito M7. Image source: Aito.

Yet, Li not only kept himself on edge but also conveyed this sense of crisis to the management. An investor in Li Auto told 36Kr that, although Li Auto’s sales were excellent at the time, several key executives were anxious about Huawei’s entry, feeling that a competitor ten times Li Auto’s size was about to enter the market. In terms of performance, the Aito M7 had a slow start in 2022, and it wasn’t until September 2023, after another redesign and a price reduction of RMB 70,000 (USD 9,620), that it began to gain traction.

In other words, the instinct of the admittedly risk-averse Li arrived more than a year early.

In the past few years, the automotive industry has swung high and low between technical concepts and capital favor. Li Auto’s rapid rise in recent years is closely related to its risk awareness, which directly correlates with the company’s understanding of resource boundaries.

In 2021, the market value of the three then-new car companies Li Auto, Nio, and Xpeng Motors all surged to USD 50 billion. After securing gargantuan sums in funding, the other two companies expanded aggressively into overseas markets, exploring car networking, flying cars, and other areas. Li Auto, however, focused almost all its resources and energy on one thing: making good cars and selling good cars. In the eyes of employees, Li almost never goes on business trips. He is noted to not have a secretary and is basically ever-present in the company.

Xpeng CEO He Xiaopeng once sarcastically commented on Li Auto’s positioning strategy, choosing to heavily bet on intelligent technology instead. But in reality, it was Li Auto’s precise positioning that quickly magnified its product power. Li Auto had conducted research showing that, among Li Auto owners, 80% are married with children, 15% are married without children, and only 5% are single, with most of the single individuals being engaged.

When discussing new car products, the bulk of internal discussions would revolve around product positioning, key selling points, and different scenarios for these selling points. Li would also instruct employees not to overdo market research but to dig from their capabilities. “Constantly doing demand research easily leads to just satisfying users, but truly good products should surpass users’ expectations,” an employee said.

Risk awareness is also reflected in the early recognition of manufacturing and supply chain pitfalls, which is crucial for large-scale industrial products like automobiles. Li Auto’s risk awareness in supply chain assurance translated directly into organizational actions. An internal source told 36Kr that, during the pandemic, Li Auto utilized a structure comprising “small towers” and “tower heads” when managing core components such as batteries motors, control systems, thermal systems, and chips. “Quality management, procurement, and supply are all here. If there’s an issue with a tower, the tower head or a higher-level supply chain leader can make a decision.”

Taking the example of chip shortages, if the tower head identifies a chip shortage, procurement can instantly be tasked to find more while quality management will perform checks immediately. The process is believed to be very fast, moving from decision-making to ordering within two hours. In contrast, traditional car companies have independent procurement and quality management teams, with each reporting and going through layers of approval, which could take up to half a month.

In September 2022, when the US required Nvidia to stop exporting high-end chips to China, Li Auto approved a RMB 4 billion (USD 549.7 million) chip purchase from suppliers on the same day. “Although the chips couldn’t be bought eventually, Li Auto’s forecast and execution efficiency for intelligent driving needs were very high,” an industry insider said. Under this system, Li Auto delivered over 10,000 units of the L8 and L9 models in their first month. Meanwhile, Nio only began to rectify its supply chain after the painful failure of the ET5 in 2023, and Xpeng continued to be troubled by supply issues even after the launch of the popular G6 model.

“To achieve deliveries and volume, you need to have people constantly checking the suppliers’ stock situation, main parts, and accessories,” a Li Auto insider said. “But the most important thing is to use sales to build confidence.” This sense of tension, born of risk awareness, is present not only in the supply chain but also on the sales side. Li monitors social media platforms like Douyin for public opinion. If negative commentary appears, he is said to reprimand the team for not responding quickly.

Internally, Li Auto has long formed a combative mindset. A mid-level employee told 36Kr that, if there’s a problem with a car due for delivery today, the leader almost doesn’t need to do anything to mobilize the team. The project manager just needs to say a word, and everyone will arrange overtime on their own.

This stance also applies to competition with peers. In September 2022, Xpeng released its flagship five-seater SUV, the G9, with standout parameters. However, due to complicated SKUs and confusing product positioning, the G9 failed to capture the market, triggering an ongoing reform storm within Xpeng.

Seizing the opportunity, Li Auto quickly warmed up its similarly priced L8 model for launch at the end of the same month. According to a Li Auto insider, the purpose was simple: to accumulate orders, noting that the schedule would coincide with the Golden Week in China, further boosting sales.

Li Auto referred to the early launch of the L8 as the “Battle of Tashan,” to symbolize the pursuit of objectives at all costs, regardless of casualties. The L8 was launched more than a month early, with everything from show cars and test cars to factory production and orders needing to keep pace. A Li Auto insider recalled that the early state of the L8’s display cars was poor, with some showroom visitors complaining about wrinkled rear seats and leaking LCD screens.

Despite the self-inflicted damage, Li Auto gained practical experience. An insider surmised that the L8 reduced the company’s subsequent production ramp-up time from six months to one month.

If one aspect had to be pinpointed as the main driver of Li Auto’s past growth, it might be its risk awareness, from which it derives its thoughtful product insights, organizational responsiveness, and combative nature.

With the product, manufacturing, and supply systems in place, Li Auto’s sales exploded in 2023, aided by learning from Huawei’s sales system. In July 2022, Li’s angry shout made Li Auto’s employees first feel the pressure of a formidable opponent and realize that a battle with Huawei was inevitable. “The voice that the Aito M7 can’t fight was quickly silenced internally, and everyone began to study Huawei and Aito. This became the company’s main theme.” Before this, Li Auto’s employees talked more about blockchain, Tesla, and Apple.

Simultaneously, Li Auto began emulating Huawei by adjusting its sales system architecture, first by hiring former Huawei executive Zou Liangjun as head of sales, and second, by assembling a retail go-to-market team of over 30 people, mostly from Huawei and Honor. Zou transplanted his management experience from the mobile phone industry to Li Auto. He managed inventory as part of his day responsibilities and mandated that any customer placing a RMB 5,000 (USD 687) deposit should receive a car within an average of seven days.

Zou also made significant adjustments to the sales system, shifting from centralized management to provincial team management, giving provincial managers more say, increasing competitive flexibility, according to a person close to Li Auto’s senior management.

But beneath the rapid sales expansion, cracks were quietly forming. A Li Auto insider revealed to 36Kr that, in the first quarter of this year, Li Auto found that its net promoter score (NPS) had fallen by 5 percentage points from nearly 80%, primarily due to sales and marketing. In the fourth quarter of last year, to boost orders, Li Auto continuously introduced various implicit price reduction measures. Combined with Li’s frequent extreme remarks on social media, the pressure valve was near bursting.

Nonetheless, the rapid sales growth fueled confidence, leading Li Auto to set a doubled sales target for 2024. Whether this target is realistic and whether it will lead to distorted actions soon became concerns that were pushed aside at that time.

Setting a sales target

“No one sets sales plans like Li Auto.”

Other car companies usually set sales targets based on capabilities, but Li Auto sets them based on market share and plans, according to a former Li Auto employee who worked in its strategy department. Li Auto’s sales targets are deduced backward from the goal of nearly 3 million units by 2028, aiming to sell 1.6 million units by 2025. “Li Xiang believes that if they don’t reach the top three in the NEV market by 2025, the company will die.”

Coming into 2024, Li Auto naturally set an 800,000-unit sales target, with approximately 650,000 units in its advantageous EREV segment and 150,000 units in its newly developed pure EV segment. “To achieve this target, the Li Mega must play a crucial role,” a mid-level Li Auto employee said. The sales plan for the Li Mega was no longer rigorously argued but adjusted to fit the set target.

An insider recounted this process to 36Kr. The high-priced pure electric MPV is a small market, so the initial monthly sales target proposed for the Li Mega by the commercial team was 3,000 units. Given that similar models like the Zeekr 009 and BYD’s Denza D9 each sold around 1,000 units a month, Li Auto aimed for a 200% increase over competitors, a target achieved with its extended-range L-series models. However, after reporting the 3,000-unit figure, the department head directly raised it to 9,000 units a month, out of belief that this was what the bosses wanted to see.

The department head’s intuition was correct. A sales forecast sent by Li Auto to the supply chain last year predicted that the Li Mega would attract 8,000 orders a month after commencing deliveries in March 2024. With three additional pure electric SUVs, the Li Mega would account for about half of Li Auto’s 150,000 pure EV sales target for the year. To demonstrate that the Li Mega could sell 9,000 units a month, the commercial team boldly moved out of the niche pure electric MPV category and selected a new benchmark: the monthly sales of BMW SUVs priced above RMB 500,000 (USD 68,720). “Li Xiang thought that those who could afford a car over RMB 500,000 wouldn’t mind the extra tens of thousands, so the Li Mega should match the BMW X5’s sales.”

However, it turned out that the imagined demand did not exist. After fulfilling the accumulated orders, the Li Mega’s monthly sales fell to over 600 units, less than one-tenth of the target. Many Li Auto employees expressed confusion to 36Kr about why the leadership was so confident in the Li Mega. “Anyone who has driven a pure EV could see the problems.”

How Li Auto made adjustments

On the fourth day after the Li Mega’s launch failure, Li Auto’s review meeting lasted until midnight. Internally, there was reflection on the strategy of deploying the vehicle in nationwide stores. “In some second- and third-tier cities in Guangxi, a RMB 600,000 (USD 82,465) car can buy a small house.” Adjustments followed. Li Auto pulled the Li Mega from some stores to make way for new extended-range L-series models, while also making targeted high-end customer invitations for the Li Mega.

More critical than specific actions for one car is whether this failure indicates a breakdown in Li Auto’s product capabilities, judgment, or even the organization altogether. Before answering these questions, it is essential to note that Li Auto is undergoing a transition: from a company with a single hit product to one managing a comprehensive product matrix—in other words, from a startup to a large company.

This background underpins Li Auto’s learning from Huawei’s organizational capabilities last year. Li has publicly stated on forums that Huawei’s integrated product development (IPD) method and other processes are very effective, helping turn Li Auto’s L7, L8, and L9 models into popular products. Besides bringing in two Huawei executives—Zou, to lead sales and service, and Li Wenzhi, to take charge of organizational transformation—Li Auto also mimicked Huawei by forming matrix-style organizations and establishing seven horizontal management departments. Under Li’s CEO office, there are brand, product, commercial, strategic, and supply departments, comprising over 500 people.

This is a significant achievement in Li Auto’s organizational learning from Huawei. However, during this transition, the judgment that Li Auto and Li himself had always been proud of has failed. For instance, Li’s positioning of the Li Mega was for it to become the top-selling vehicle above RMB 500,000, across the board. He also believed that launching the Li Mega and the new L-series models together would generate more buzz. These judgments were all contrary to the facts.

According to 36Kr, Li later reflected that, in the past year, his decision-making process lacked some counterbalancing voices. In subsequent hires, he ostensibly considered people with a stronger propensity to voice contrary opinions. Learning from some of Huawei’s organizational forms also seemed to lower efficiency. For example, under the matrix-style organizational structure, Li Auto promotes co-creation meetings to align different departments’ ideas. For some key products, co-creation meetings could start at 9 a.m. on Saturday and end at 5 a.m. on Sunday.

After its failed attempt to challenge the pure EV market, Li Auto underwent an organizational adjustment in April. The most significant change was the integration of the product strategy and commercial departments. The previous mode of managing pure EV and EREV products independently was also canceled. In place, three product lines were formed based on price segments, led by Tang Jing, Zhang Xiao, and Li Xinyang.

Experienced employees observed that Tang, Zhang, and other long-serving Li Auto members all dared to stick to their opinions, noted to have debated with Li about product definitions on various occasions. Their return to key positions therefore seems to have a special purpose for Li.

Li’s attention is now devoted more toward products and strategy, areas that his strengths complement. Meanwhile, the adjusted structure has streamlined the management of pure EV and EREV products. Overall, the organizational adjustment revolves around enabling Li and Li Auto to make more accurate decisions.

However, those involved in organizational change pointed out that building an organization takes a long time. “In Huawei’s learning process from IBM, it often first became rigid, then optimized, and finally solidified. Li Auto’s organizational learning will take 2–3 years to see results.”

Compared to the long process of building organizational soft power, Li Auto’s position may rely more on returning to its fundamentals. Li Auto’s past growth was based on its ability to define the value of EREVs and its first mover advantage in the EREV segment. But in the pure EV market, others hold that advantage. Adding to the difficulty is the more intense competition now. With the rise of Huawei, Xiaomi, and other competitors, new players can be easily overwhelmed—breaking through will require not only soft power but also substantial investment.

Even prudent companies need to learn to invest

Data-driven decision-making is one of Li Auto’s main characteristics, with employees telling 36Kr that any resource application requires strict data validation. “Leadership requires every plan to be clearly outlined, with clear implementation strategies and tightly aligned budgets, but often in practice, you don’t get this condition.” This is rooted in Li Auto’s prudent culture. Li himself has said that the company’s decisions need rigorous data models.

For example, in the sales system, Li Auto has an artificial intelligence-powered system that can monitor and predict weekly and monthly production and sales data, to help reduce inventory and track conversion rates from leads to test drives and deposits. However, while data-driven decision-making brings high efficiency and quality, it can also leave blind spots. For instance, investments in technology R&D and branding, which are difficult to justify in terms of output, can lead to delayed investments.

After rapid sales growth in 2022, Li Auto began increasing its technological investments. In the first quarter of 2024, Li Auto’s R&D expenses reached RMB 3 billion (USD 412.3 million), up 64.6% year-on-year. These expenses were partly spent on systems related to pure EVs and partly on intelligent driving. However, the infrastructure for pure EV charging cannot be built overnight. This was one of the factors that led to the failure of the Li Mega.

Li Auto’s “silver bullet” for pure EVs had been 5C charging, promising cars that could cover a 500-kilometer range with a 12-minute charge, which would be close to refueling efficiency. According to Li Auto’s initial plan, by 2025, it would invest RMB 10 billion (USD 1.3 billion) to build 3,000 ultra-fast charging stations, mainly in highway service areas, while relying on existing fast-charging stations and home chargers for urban areas. However, after the Li Mega was launched, the sales team discovered a significant flaw: the customers attracted were not typical, potential pure EV users who had little understanding of charging. Instead, they were noted to probe salespeople regarding the availability of charging stations, in response to Li Auto’s marketing of 5C fast-charging capabilities.

To bolster its pure EV strategy, Li Auto appointed last year’s sales leader as general manager for Shanghai, planning a comeback in the city—a market with strong consumption power but where Li Auto had been marginalized. The Li Mega was also launched in Shanghai, but the reality was that, nearly a month after the launch, Li Auto had yet to build a single 5C ultra-fast charging station in Shanghai. After the Li Mega’s initial failure, Li Auto revised its plan for ultra-fast charging stations, aiming to build 5,000 stations by 2025, with over 2,000 stations planned for 2024.

However, industry insiders expressed pessimism about Li Auto’s franchise model for station construction. This approach is too slow for new players today—many prime locations and power resources have been seized by early movers like Nio and the State Grid Corporation of China, leaving later entrants with pricier and less optimal sites, reducing their willingness. “If you want to build 2,000 stations within a year, it’s best to start with self-funding. The franchise route is too slow,” an insider said.

A Li Auto employee from its charging technology team also reported that the company’s high requirements for construction, acceptance, and brand elements often led to conflicts with franchisees. “The process is long, and conflicts are frequent. Sometimes, after establishing one station, there is no follow-up.”

As of July 3, Li Auto had built 616 ultra-fast charging stations. With 2024 half over, only one-third of the over 2,000 stations planned for this year have been completed. Similarly, the rush to catch up in intelligent driving has been nerve-wracking. In 2023, Li Auto began an intelligent driving blitzkrieg, but due to late investment, it took nearly half a year to update its technical roadmap, only starting to advance its urban intelligent driving solutions without high-precision maps in the latter half of the year.

However, an insider revealed that Li was dissatisfied with this version’s experience after the Lunar New Year and reprimanded the intelligent driving team in meetings, delaying the mass production timeline. Only recently, after re-evaluating the solution’s effectiveness, did Li Auto increase efforts to push it to users.

To catch up with leading players, Li Auto is also betting on new solutions such as end-to-end large models, a trend led by Tesla. According to 36Kr, the intelligent driving team, led by Lang Xianpeng and consisting of over 300 people, has been developing this solution for more than two months, with results expected by the end of the year.

The effectiveness of this new solution remains unknown. Regardless, intensive closed-loop development has become the norm for Li Auto, and the overall direction is to play catch-up with increased technological investment. A mid-level manager told 36Kr that Li Auto now invests between 10–30% of its revenue into technology R&D annually, depending on its earnings.

After the debacle with the Li Mega, Li Auto sought reprieve by retreating to the familiar territory of extended-range vehicles. Sales have gradually rebounded, and with the addition of the cheaper L6 extended-range model, Li Auto’s June delivery volume has inched close to the peak performance of 50,000 units per month achieved toward the end of last year.

As an ambitious company, Li Auto will undoubtedly make another push for higher sales. This time, however, making headway requires breaking into the pure EV segment, withstanding intense competition, and building deeper and more sustainable momentum.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Li Anqi for 36Kr.


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