Li Auto moves to negative margins

Firm feeling the brunt of investing to try to meet Chinese market's vehicle software appetite

Li Auto moves to negative margins
Li Auto could risk losing ground to other emerging EV makers like Xpeng and Nio

Chinese OEM Li Auto saw its profitability take a hit in the first quarter, as the highly competitive Chinese NEV market saw the challenger automaker's operating margin shrink to -2.3pc.

The firm posted a $81mn loss for the quarter, driven by a significant hike in operating expenses that more than offset strong growth in the company's deliveries, which grew by 53pc year-on-year. The negative operating margin comes after the OEM posted its first full-year profit at the end of 2023.

The company saw its gross profitability squeezed as the effects of the price war in the Chinese market knocked the firm's gross margin down to 20.6pc, compared to 23.5pc in the fourth quarter of 2023. Despite the sequential decrease, however, this gross margin level is fairly healthy in light of the strong downward pricing pressure in the affordable NEV segment in China.

Rather, the catalyst for Li Auto's diminished profitability is a 65pc uptick in R&D spending, as the firm aims to standardise Level 4 autonomy in its BEV range, with microchip supply deals with computing heavyweights Nvidia and Qualcomm.

Indeed, Li cites "increased expenses to support the expanding product portfolios and technologies" in a market which increasingly prizes vehicle software and is now populated by technology firms such as Xiaomi crossing over into automotive manufacturing.

“Despite the rollout of a new model, product iterations, and pricing adjustments, our first quarter financial results remained solid. Our revenue reached RMB25.6bn ($3.54bn) for the period, growing by 36.4pc year over year, and our gross margin stayed healthy at 20.6pc," Li Auto chairman Ti Lie says. "While our first quarter deliveries fluctuated sequentially, we remain confident that our deliveries will continue to grow in the coming quarters.

Li could be at risk of being caught up by other emerging Chinese NEV rivals such as Xpeng and Nio, both of whom posted stronger April delivery growth compared to Li. Xpeng also recently announced its entry into the French market as its international expansion push continues.

Li has attributed its slowdown in volume growth to being at a point of of product changeover as it ramps up its L6 SUV, for which the firm says it already has over 20,000 orders.

"“Li L6, our first model priced under RMB300,000 ($41,4000), has garnered widespread popularity among young families following its April debut. We will commence large-scale deliveries in May,” says Li Auto CEO Xiang Li.

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