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Li Auto’s latest strategic shift leaves little margin for error

Written by 36Kr English Published on   6 mins read

Who knew the underperformance of a single model could spark such a profound change in the automaker’s strategy?

The ripple effects of Chinese automaker Li Auto’s first pure electric vehicle, the Li Mega, continue to unfold. Amid organizational changes, price cuts, and layoffs, Li Auto has once again adjusted its product strategy.

On the evening of May 20, CEO Li Xiang announced during Li Auto’s Q1 earnings call that there will be no new pure electric SUV releases this year, with the schedule now shifted to the first half of 2025. Originally, Li Auto planned to launch three pure electric SUV models in the second half of 2024. By the end of 2024, Li Auto aimed to have four extended-range and four pure electric models on the market. However, this schedule has been entirely altered.

Meanwhile, Li Auto is looking to international markets for new growth opportunities. During the earnings call, senior vice president Zou Liangjun said that Li Auto will establish after-sales service systems in Central Asia and the Middle East this year, and will explore selecting agents in countries and regions outside of Western Europe and North America for market expansion.

This significant adjustment comes against the backdrop of Li Auto’s pressured Q1 financial performance. In Q1, Li Auto achieved revenue of RMB 24.3 billion (USD 3.3 billion) with sales of 80,200 vehicles, a 32.3% increase from last year’s Q1 revenue of RMB 18.3 billion (USD 2.5 billion). However, the operating profit showed a significant loss of RMB 585 million (USD 80.7 million), ending four consecutive quarters of operating profits. Thanks to Li Auto’s RMB 1.069 billion (USD 147.6 million) in interest and investment income, the final net profit was RMB 591 million (USD 81.6 million), though it nonetheless resulted in a significant 36.7% year-on-year decline.

In fact, Li Auto’s over 80,000 quarterly deliveries are not bad among the new forces in the market. But the losses and subsequent chain reactions from the lackluster performance of Li Mega have put significant pressure on Li Auto’s originally stable financial situation.

Analyzing the financial impact

Some indicators have already revealed Li Auto’s financial burden. In Q1 this year, Li Auto delivered 80,400 vehicles, a 38% decrease from the previous quarter. Consequently, Li Auto’s inventory increased by about RMB 5.3 billion (USD 731.8 million) from the end of last year to RMB 12.1 billion (USD 1.6 billion). The increase in inventory likely points to both finished vehicles and raw material stock. According to 36Kr, the current monthly sales of Li Mega are less than 1,000 units, with inventory exceeding 1,000 units.

Li Auto’s accounts payable also increased by RMB 2.7 billion (USD 372.8 million) from the end of last year. This may be due to Li Auto extending the payment terms with suppliers, with some suppliers reporting that Li Auto extended payment terms from the previous 60 days to 90 days. This allowed Li Auto to maintain a high cash flow of RMB 98.9 billion (USD 13.6 billion) in Q1. In April, Li Auto decided to cut prices across all extended-range models. The price of Li Mega was reduced by RMB 30,000 (USD 4,140), and the maximum price cut for the L-series models was RMB 20,000 (USD 2,760). The overall price reduction also impacted Li Auto’s finances.

With the affordable Li L6 starting deliveries in April, Li Auto’s Q2 delivery guidance is 105,000–110,000 vehicles, with revenue between RMB 29.9–31.4 billion (USD 4.1–4.3 billion), a year-on-year increase of 4.2–9.4%. This means that Li Auto needs to sell at least 182,000 vehicles in the first half of the year. However, according to the secondary market’s minimum annual sales target of 560,000 vehicles, Li Auto will need to sell 374,800 vehicles in the second half of the year—almost equal to its total sales for 2023, requiring over 60,000 vehicles sold per month.

Under the extreme pressure on extended-range models, the adjustment and re-entry of pure EV products into the market are crucial for Li Auto’s long-term financial health.

Selling extended-range vehicles, reintroducing pure EVs

One reason for delaying the pure electric SUV models is to allow sufficient time for building the charging infrastructure. During the earnings call, Lu said that the essential prerequisite for selling mid- to high-end pure electric SUVs is having enough self-operated supercharging stations.

For reference, as of March this year, Tesla had deployed over 1,900 supercharging stations with more than 11,000 superchargers in mainland China. Li Auto aims to build more than 2,000 supercharging stations with over 10,000 superchargers by the end of this year. As of May 19, Li Auto had 404 operating supercharging stations equipped with 1,770 superchargers.

Additionally, Li Xiang believes that to support a new model achieving monthly sales of over 10,000 units, about 500–600 new fixed exhibition spaces nationwide are required. Otherwise, launching more products without increasing sales is problematic, as seen with the L8 in recent months. This will completely change the launch rhythm of Li Auto’s pure electric models. Besides building the charging network, the larger adjustment might be in the pure EV products themselves.

Unnamed industry insiders told 36Kr that the frontend design of Li Auto’s pure electric SUV models has a high overlap with Li Mega, which might prove to be disadvantageous. Thus, some industry insiders speculate that Li Auto might make substantial adjustments to the pure EV models, possibly even redesigning and redefining the products. Li Auto has almost a full year until the middle of next year to make these adjustments.

However, this is not a small challenge as delaying the launch of pure EV models will put enormous pressure on the supply side. After all, Li Auto’s factory for pure EVs has been in operation for a year, and waiting another year to start production is economically unviable. In the fiercely competitive market, Li Auto also needs to recalibrate market demand for pure EV products and offer higher configurations. With both internal and external challenges, there is little margin for error. Li Auto must also compensate for the one-year gap through the sales efficiency of extended-range vehicles.

During the earnings call, Zou said that Li Auto is currently adjusting the number and quality of sales stores to provide more exhibition cars and store space. For example, of the 43 new stores opened this year, more than half can display over nine cars. Li Auto also closed some smaller stores and adjusted the pace of expansion in third- and fourth-tier cities.

However, Li Auto’s store expansion is not as rapid as it was at the beginning of the year. Initially, Li Auto planned to expand to over 800 stores this year, but according to 36Kr, the target is now around 550 stores by the end of the year. As of May 19, Li Auto had 488 retail stores.

Additionally, Li Auto is trying to keep up with players like Huawei in the intelligent driving field. Li Auto stated that, in Q3 this year, it intends to roll out the map-free smart driving feature for all AD Max vehicles nationwide, with a beta test already started in May.

From the optimistic 800,000 sales target to a return to reality, Li Auto has undergone rapid adjustments in organization, pricing, and products in just over two months. For a company with over 30,000 employees, this level of execution is impressive. However, a full-scale adjustment often has a time lag.

Some impacts are already evident in the short term. Li Auto noted that after the price cuts, weekly orders for the L7, L8, and L9 models increased in April. Some actions, like organizational upgrades, will take longer to see results. From Li’s perspective, significant outcomes will usually take 12–24 months, with clearer results expected in 2025.

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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