Li Xiang: In the face of Huawei's mentality, 80% is learning, 20% is respect, and 0% is complaining

Lei Jianping on November 10

Li Auto (stock code: 2015) yesterday announced its financial results for the third quarter of 2023. According to the financial report, Li Auto's revenue in the third quarter of 2023 was 34.68 billion yuan (US$4.75 billion), an increase of 271.2% from 9.34 billion yuan in the third quarter of 2022 and an increase of 21% from 28.65 billion yuan in the second quarter of 2023.

Li Auto's total vehicle deliveries in the third quarter of 2023 were 105,108 units, up 296.3% year-over-year.

Subsequently, Li Xiang, Chairman and CEO, Ma Donghui, President and Chief Engineer, Li Tie, Co-founder and CFO, and Zou Liangjun, Vice President of Sales and Service, attended the conference call and communicated with investors. Li Xiang revealed on the conference call that in October 2023, Li Auto's Changzhou manufacturing base completed a capacity upgrade to prepare for further production ramp-up in the fourth quarter.

"In terms of supply chain management, we have continuously broken the bottleneck of parts supply by optimizing management strategies, upgrading management processes, and strengthening efficient collaboration with suppliers. In the fourth quarter, we expect our total deliveries to reach 125,000 to 128,000 vehicles. ”

Since the second half of 2023, Huawei has made frequent moves in the automotive field, including the Wenjie M7 and M9, which have had a certain impact on Li Auto and have also become a concern for Li Auto's management.

When talking about Huawei, Li Xiang said that in the face of Huawei's good attitude, 80% is learning, 20% is respect, and then 0% is complaining.

The following are the core contents of Li Auto's conference call:

Question: Li Auto has increased its promotional efforts since the third quarter, and the overall promotional discount has not narrowed significantly in the fourth quarter. How do you see the impact of gross profit margin and profitability in the fourth quarter and next year? Can the performance of gross profit in the third quarter be sustainable?

Li Tie: Every quarter of the year, the company fully considers the balance between sales growth and gross profit margin when formulating future sales policies and promotion strategies. Our quarterly sales policy also fully considers the supply chain factors to better match the promotion strategy. From the perspective of the company's operation, we always want to maintain the gross profit margin at more than 20%, which we believe is a relatively healthy level to ensure that there are sufficient funds to invest in R&D and further expand the service network in the future.

Question: Li Auto began to focus on the development of intelligent driving this year and increased investment. Management is asked to provide quantitative targets for investment scale and team expansion in 2024 and 2025. With the increase of investment, how should we measure the progress of Li Auto in intelligent driving, such as the timetable for opening up the 100 cities of assisted driving to all users? In addition, after the increase in investment, will it still adhere to the strategy of standard configuration of the whole intelligent driving system?

Ma Donghui: The company has always attached great importance to investment in intelligent driving. At this year's autumn strategy meeting, we also conducted in-depth discussions on intelligent driving and reached a consensus that we will take the technological leadership of intelligent driving as our core strategic goal in the future. In terms of investment, we currently have about 900 intelligent driving R&D personnel, and we plan to reach about 2,000 intelligent driving R&D personnel by the end of next year, and more than 2,500 in 2025.

As the scale and density of talent increases, we will also promote the research and development of products and technologies. On the one hand, a variety of full-scene NOAs will be launched, including high-speed and urban scenarios; On the other hand, we have increased the research and development of AI algorithms and cutting-edge technologies for intelligent driving. In terms of investment, in the future, we will increase R&D investment in vehicles, testing, algorithms, and personnel. Sufficient cash reserves and cash flow can provide the necessary financial support for the research and development of intelligent driving.

In terms of project progress, the plan is to push the official version of AD Max 3.0 to all Max users in December this year, providing all-scenario NOA functions and adopting a unified BEV architecture. In addition, we will be upgrading the auto-parking function. At the same time, we will push the official version of AD Pro 3.0 software to users in the first half of next year, and some of the algorithm capabilities of AD Max will be released on AD Pro, and Pro's ability to assist driving will be greatly improved, and we are confident that we will become the first echelon of intelligent driving in the first half of next year.

As for the standard configuration, we will always adhere to the standard configuration of the whole system of intelligent driving system, which enables us to have the largest intelligent driving "fleet" in China and obtain more training mileage data, which will also promote the accelerated iteration of our large model algorithm.

The number of retail stores in third- and fourth-tier cities will exceed 110

Q: As Li Auto expands to more cities, how do you view the difference in user needs between high-tier and lower-tier cities (including range extension and pure electric vehicles)? How will Ideal adapt its marketing strategy to better capture these differences in demand?

Zou Liangjun: In high-tier cities, Li Auto's market share in the SUV market of more than 300,000 yuan has reached 50%, but the average market share of all Li Auto's products is less than 20%, which means that we still have a lot of room for growth in the future. Overall, we will continue to focus on first-tier cities, new first-tier cities and second-tier cities, with a focus on increasing market share in top cities. At present, we have not yet reached market saturation in first- and second-tier cities. In these cities, we have a lot to offer.

In the SUV market, which costs more than CNY 300,000, the BBA sells about 55,000 units per month. In the fuel SUV market of more than 300,000 yuan, the monthly sales of first- and second-tier luxury car brands, including BBA, are about 90,000 units, which means that we have enough room to achieve the next stage of growth. In addition, we have begun to accelerate the layout in third-tier cities and accelerate the opening of stores in key fourth-tier cities.

Up to now, we have more than 300 retail stores across the country, including more than 100 retail stores in third- and fourth-tier cities. According to the current progress, it is expected that by the end of this year, the number of Li Auto's retail stores in third- and fourth-tier cities will exceed 110.

Q: Regarding the supply chain and cost reduction plan, has the capacity bottleneck of the current supply chain been completely solved? In addition, are there any goals and specific plans for supply chain cost reduction? What are your plans for capacity and capex over the next two years?

Ma Donghui: On the supply side, the supply bottlenecks encountered before have been successfully resolved. For next year's new models, we have formulated a medium- to long-term supply strategy in terms of vehicle manufacturing and parts procurement to improve supply resilience and supply security.

Regarding cost reduction, we believe that the relationship between OEMs and partners must be a long-term and stable cooperative relationship, and it must be a win-win result. In the short term, we will focus on business cost reduction, but in the medium and long term, we will return the procurement price to a reasonable level through the project platform, including the aggregation of procurement and cost accounting.

In terms of medium- and long-term cost reduction strategies, we will look for opportunities to reduce costs and increase efficiency from end-to-end and full-chain, including product research and development, and technological innovation to optimize costs. At the same time, we will continue to optimize and upgrade our industrialization and digital empowerment partners to improve the efficiency of the manufacturing process and reduce the waste of quality and costs.

Finally, in terms of production capacity, Li Auto currently has two manufacturing bases in Beijing and Changzhou, which can effectively support the sales target for the next two years.

Question: With the launch of Huawei's M7 and Denza's new models, many investors are very concerned about how the new competition situation will affect Li Auto?

Zou Liangjun: Although the market competition for new energy vehicles is fierce this year, Li Auto has still achieved very bright sales results this year. The three models of the L series continue to sell well, and all of them are popular. Up to now, the cumulative delivery volume of each model on sale of Li Auto has exceeded 100,000 units.

While maintaining a steady growth in sales, Li Auto's market share in the NEV market of more than 200,000 yuan has also continued to increase, from 10.9% in the first quarter to 15.4% in the third quarter.

At present, the penetration rate of the new energy vehicle market has exceeded 35%, crossing the innovation diffusion gap and entering the early mass period. It is believed that the accumulated user base and market share will support the continued improvement of Li Auto's delivery volume and market share in the increasingly fierce market share competition in the future.

Q: What is the difference between the layout of Li Auto's charging stations in the city and along the highway? How can we further differentiate in terms of user experience?

Zou Liangjun: In urban areas, whether it is a public or home charging pile, our users can still easily obtain charging facilities and services, and can also enjoy a more complete charging experience. Therefore, at this stage, the top priority for us is to solve the biggest pain point faced by users, that is, the problem of charging and replenishing energy on the highway during long-distance travel.

In addition to building charging piles along highways, we have also launched the technology of charging for 500 kilometers in 12 minutes, hoping to alleviate users' anxiety about the power of pure electric vehicles. In addition, with the launch of pure electric models next year, we will also promote the construction of urban charging stations.

In terms of product experience, we will continue to take into account both hardware and software, and strive to provide users with a complete integrated service experience. For example, when the car owner is looking for a charging pile, the status of the charging gun and the charging pile can be queried and displayed on the vehicle system; We also provide plug-and-play, password-free payment to bring users a better experience, and remote battery preheating for pure electric vehicles, all of which are to provide users with the best service. We hope that through the improvement of these service experiences, users can get the best charging experience.

In the face of Huawei's good attitude, 80% is learning, and 20% is respect

Question: In the face of competitors such as Huawei and Xiaomi, how do you view the overall competition pattern of China's electric vehicle industry in the future? What are the key indicators for Chinese EV companies to maintain good operations?

Li Xiang: First of all, you may be more interested in the current competition between Huawei's products and ours. Our internal perception is actually very consistent now, that is, we have a good attitude towards Huawei, 80% is learning, 20% is respect, and then 0% is complaining. As a start-up, we are actually very lucky and excited to meet such a trillion-dollar revenue model of science and technology when we are entering the scale of 100 billion revenues, which is our true mentality.

And then the second point, we diagnose internally, if we want to achieve a scale of millions of vehicles, in today's fierce competition, it is actually 3 dimensions and 9 levels of competition.

First, at the consensus level of the enterprise, including corporate culture, user brand, and corporate strategy, the synergy of these three levels should be very good.

Second, we need to do a very good job of synergizing our consumer-facing business layers, including product and R&D, sales and service, and supply and manufacturing.

Thirdly, and we have always attached great importance to it in the past, is the construction of the entire functional system, including people and organization, IT and processes, as well as finance and company operations.

I think from these 9 dimensions, if you want to achieve more than 1 million vehicles a year, these 9 points will form a short board theory, that is, every aspect must be good enough to be able to be a smart electric vehicle company that sells more than 1 million vehicles per year under high competition.

MEGA will be officially released in December

Question: The Beijing pure electric plant is about to be put into operation with the MEGA, how long is it expected that the production capacity will climb to a stable stage? Based on the higher pricing of MEGA, the profitability level will be higher after achieving stable production capacity, but how do we view the profitability of MEGA compared to the initial stage of production, and will it pose a challenge to the profitability in the first and second quarters of next year?

Ma Donghui: The MEGA is our first all-electric model, and it is also a new electric platform, and it will be produced at a new plant and production line in Beijing. It is true that the whole process of ramp-up will be challenging, but we also have a lot of opportunities.

First, we have mature experience in rapid ramp-up, whether it is L7, L8 or L9, these models have reached a high level of delivery in a short period of time after they were launched, and we have accumulated a lot of experience in review.

Second, we worked with our supplier partners to sort out the NUDD parts on MEGA (NUDD is a methodology for identifying and managing quality risks in the early stage of new products, i.e., New, Unique, Difficult, and Different). It has also formulated a special project for quality control and capacity climbing.

In terms of personnel, we have carried out the recruitment and training of factory personnel in advance.

Overall, we are confident that we can ensure the smooth ramp-up of MEGA, and ensure that it will be listed when it is released and will be launched in volume.

The MEGA will be officially launched in December, and there will be some impact on profitability during the ramp-up phase of the initial ramp-up phase, but we believe that gross profit will reach a healthy level in a very short period of time after production stabilizes.

Question: Ideal mentions technological leadership, especially wind resistance, in the spread of MEGA. How does MEGA balance technology leadership and marketing to better engage consumers? How will subsequent MEGA bookings highlight the selling points to attract consumers?

Li Xiang: I think MEGA can definitely be the most leading in the industry in terms of vehicle safety, functional configuration, comfort and other aspects under the traditional automobile value system, taking the needs of family users as the standard. But we don't think that's enough. In addition to these, there are three important breakthroughs in all of our BEV products:

- The first is a breakthrough in charging: 500 kilometers of energy can be replenished in 12 minutes, and large-scale charging stations will be built on highways, so that any consumer can buy an electric vehicle with confidence.

- The second is a breakthrough in space: with the redesign of the entire high-voltage electrification structure, any of our products will be the largest in the same class of cars, which is one level higher, breaking through the traditional form factor, which will bring the best space experience to family users.

- The third is styling: all of our BEVs will redefine every category, whether it's MPVs, SUVs, or sedans, and we'll put the styling and ideas that people think will only be seen in concept cars in today's EVs in the next few decades.

Through the above methods, we have made a higher-dimensional breakthrough in the three most important value points for users: the sense of security brought by charging, the sense of value brought by space, and the sense of yearning brought by leading shapes. All of our pure electric products will adhere to these three important principles.

Question: Recently, a series of products launched by major automobile companies are more homogeneous, with more and larger screens and better human-computer interaction. Everyone is more worried about the future competition pattern, on the one hand, it is worried about product homogenization, and on the other hand, it is more reflected in finance. Are the three important principles of charging, space and styling the core value of Li Auto's differentiated competition? Is there more information to give investors more confidence in prices and earnings next year?

Li Xiang: In terms of the core value of users, the most critical thing we do is not to make some quantitative changes, because quantitative changes are already the basis of competition, such as cheaper prices, higher cost performance, more configurations, more screens, and more functions. We really want to achieve breakthroughs in higher dimensions at the three most critical value levels for users, and I think this is the most important thing for us.

For example, we look at the charging rate of the whole cycle of 5C charging, until we charge to 85%, and the lowest speed exceeds the maximum speed of the best performing brand in the entire industry at present. This is the new height we want to establish, Li Auto continues to innovate in products, R&D and value, so as to continue to bring more value to our home users, there is no shortcut.

Four products will be released and delivered in 2024

Q: What is Li Auto's new car plan for 2024, especially the follow-up pure electric models of MEGA? Li Auto has two platforms, Whale and Shark, what is the product positioning corresponding to these two platforms, the pace of pure electric vehicle launch and the delivery time?

Li Xiang: In 2024, we will release and deliver a total of four products, which is also the most product-rich year since the company was founded. In the first half of 2024, the company will release the Li L6, a mid-to-large SUV for younger families. In the second half of the year, three pure electric products will be delivered. The cadence of model launches and deliveries continues our tradition.

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