In 2022, Li Auto experienced growth in both revenue and sales volume; however, this success concealed a troubling reality for the companyDespite the increase in revenue, Li Auto found itself trapped in a predicament of declining profitability, with losses soaring over five-fold.

On February 27, 2023, Li Auto unveiled its financial report for 2022, revealing an impressive total revenue of 45.29 billion yuan, marking a 67.7% year-on-year increaseThe company achieved record deliveries, totaling 133,000 vehicles—a 47.2% rise compared to the previous yearHowever, this dual growth in revenue and sales volume was not enough to remedy the alarming rise in their net losses, which reached 2.03 billion yuan for the year, more than five times the amount from the previous period.

"Aiming for a 20% market share"

The expansion of product offerings and subsequent sales growth were pivotal in driving Li Auto's revenue gains

Advertisements

The year 2022 marked a crucial turning point for the company, with the introduction of new models, the L9 and L8, which put an end to their singular product strategyHowever, the launch of these new models temporarily impacted production, leading to only 4,571 deliveries in August 2022 and resulting in a total of 26,500 vehicles delivered in the third quarter—a significant slowdown compared to previous quarters.

As production ramped up for the L9 and L8 models, December saw a monthly delivery figure exceeding 20,000 vehicles, culminating in a total of 46,300 deliveries for the fourth quarterCEO Li Xiang indicated optimism for the coming months, stating, "With the launch of the L7, Li Auto expects to achieve monthly deliveries exceeding 30,000 units in the second quarter."

The inclusion of high-end models L9 and L8 contributed to an increase in the average selling price of Li Auto's vehicles

Advertisements

The total revenue for the year reached 44.11 billion yuan, reflecting a 68.8% increase, with these premium models accounting for over 97% of total revenue—an essential factor in the robust annual revenue growth.

Following the February launch of the L7, the company now offers three models: the L9, L8, and L7. The L8 and L7 are available in three versions—Air, Pro, and Max—with prices starting as low as 300,000 yuan, thus expanding Li Auto's price range to between 300,000 and 500,000 yuan.

However, an increase in product variety raised concerns about whether overlapping target demographics for the three models might lead to internal competition for orders

Advertisements

During the earnings call, Li Xiang dismissed these worries, clarifying that the intended audiences for L7 and L8 are distinctly defined, with only a negligible overlap in customer demandIn fact, he noted that attention on the L7 has actually raised interest in the L8 as well"Through effective pricing coverage of the L7, L8, and L9, we are building not just a product line but a product network aimed at meeting the needs of family SUV users in the 300,000 to 500,000 yuan range," he said.

Buoyed by strong sales and new model introductions, Li Auto set ambitious goals for itself, with Li Xiang asserting, "Our target this year is to capture 20% of the market share within the 300,000 to 500,000 yuan segment."

Li further elaborated that last year, the company's market share in the 300,000 to 500,000 yuan range was 9.5%, while this year's market size is projected at around 1.4 to 1.5 million vehicles

• After Tesla, Ask the World has also cut prices!
• Gold Expected to Reach 2725 High
• The Outlook for US Stocks and Bonds
• U.S. Government Debt Hits the Red Line!
• Strengthening Financial Services for the Real Economy

"We hope to double our sales, hence the 20% targetThe competition in the 200,000 to 300,000 yuan segment is more fierce, so we need to scale up before we can compete on cost within that range," he said.

As a result, Li Auto aims to achieve a delivery target of 300,000 vehicles for the year.

Expanding Net Losses

Despite the increases in sales volume and revenue, Li Auto's losses have continued to grow, culminating in a net loss of 2.03 billion yuan for the year—a staggering rise of over five-fold compared to the previous year

This translates to a loss of approximately 15,200 yuan for every vehicle sold last year.

Earlier, Li Xiang had publicly stated that the company aimed to achieve over 10 billion yuan in monthly revenue during 2022 and put an end to a seven-year streak of lossesHowever, the current trend does not indicate any signs of breaking this losing streak.

Li Auto’s struggles also stemmed from difficulties encountered during the third quarter due to the transition between new and old models, resulting in significant legal disputes that escalated lossesIn the first three quarters of 2022, Li Auto recorded net losses of 11 million yuan, 641 million yuan, and 1.646 billion yuan, respectively, with only the fourth quarter yielding a net profit of 265 million yuan.

In August of that year, the company announced it would halt production of the Li ONE and introduce its successor, the L8. This decision sparked dissatisfaction among existing Li ONE owners, causing significant declines in sales of the Li ONE due to price cuts and legal actions from unhappy customers

During this period, Li Xiang stated the model transition had led to an astounding 803 million yuan in inventory provisions and purchase commitment losses related to the Li ONE in the third quarter.

This turmoil also contributed to a decline in the company's vehicle gross marginsReports indicated that Li Auto's vehicle gross margin fell to 19.1% last year—a 1.5 percentage point dip compared to the previous yearThe primary factor for this decline was the inventory provisions and purchase commitment losses from the Li ONE in the third quarterNonetheless, when contextualized within the global pandemic landscape, Li Auto's 19.1% gross margin remains comparatively robust against competitors like NIO and Xpeng.

Additionally, increased costs related to product launches, sales, research, and development also played a significant role in the expanding net losses

Data revealed that the company's operating expenses, comprising R&D and selling, general, and administrative costs, surged to 12.45 billion yuan, an 83.6% rise compared to 6.78 billion yuan in 2021.

R&D expenses alone reached 6.78 billion yuan, indicating a 106.3% increase year-on-year, representing about 15% of total revenueThe company attributed this upsurge to an increase in personnel numbers leading to higher payroll costs, along with new model and technology development activities.

Sales costs also soaredData demonstrated that Li Auto's total sales costs hit 36.5 billion yuan last year, up about 72%, outpacing revenue growth of 68%. Li Xiang acknowledged during the earnings call, "In the second half of 2022, we indeed faced some challenges, as we transitioned from selling a single vehicle model to multiple models, and the support system for our sales service network encountered significant challenges."

Supply chain issues also significantly impacted sales costs

The price of battery-grade lithium carbonate skyrocketed more than tenfold within the year, peaking at around 600,000 yuan per tonHowever, since the start of this year, lithium prices have begun to decline, alleviating some cost pressures on automakersBattery giant CATL has thus proposed a "lithium mine rebate" plan to several automakers, including NIO and Li Auto, conditional upon preferential pricing of around 200,000 yuan per ton for lithium carbonate in conjunction with about 80% of battery procurement orders over the next three years.

In response, Li Auto's president and chief engineer Ma Donghui remarked during a conference call that negotiations regarding pricing with partners are ongoingWith lithium prices gradually decreasing, he emphasized that lithium batteries will remain a prominent trend, and the company will persist in pursuing a diversified supply strategy to ensure the security of its supply chain and development pace.

Despite these developments, the disruptions caused by supply chain issues, extended vehicle delivery cycles, and other challenges have left many consumers skeptical