Ideal tangled in pressure competition, heavily invested in AI seeking breakthrough

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Author | Chai Xuchen

Editor | Zhou Zhiyu

The past year was not an easy one for Li Auto, despite bold talk about AI and transitioning to full electric vehicles.

On the evening of March 12, Li Auto released its financial report for the fourth quarter and full year of 2025. For a long time, Li Auto was the only domestic new car maker able to reliably maintain a gross profit margin above 20% and achieve sustained, significant profitability. However, this time, Li Auto is walking a tightrope at the breakeven line.

"The past year was an important period of strategic adjustment for Li Auto," admitted founder and CEO Li Xiang during the earnings call. In this period, called "pain and reconstruction," Li Auto faced not only external challenges of fierce price wars and setbacks in electric vehicle transformation but also deep internal organizational reflection.

The Winter Chill

Last year's winter was indeed hard for Li Auto.

According to the financial report, in the fourth quarter Li Auto suffered a double blow in revenue and profit. That quarter, operating profit turned into an actual loss of 400 million yuan. In comparison, the previous quarter, after removing the impact of the Mega recall, operating profit was near breakeven (-70 million yuan).

This is the first time since 2023 that Li Auto has walked the tightrope in terms of operating profit.

The final net profit in the report stayed positive, but not because of selling cars — it was mainly due to the company's massive cash reserves generating interest income (about 430 million yuan).

It's worth noting that Li Auto's management long held one baseline: around 20% gross margin is the cornerstone of healthy development. But in the fourth quarter, real gross margin on car sales fell to just 16.8%. Compared to Q3's 19.8% after excluding the Mega recall, that's a drop of 3 percentage points.

This was due to a decline in overall car prices. From the perspective of single-car economics, the situation is clearer.

In Q4, Li Auto's real gross profit per car was only 42,000 yuan, down 13,000 yuan from last quarter’s 55,000 yuan (after excluding Mega recall). Although Q4 unit cost dropped 15,000 yuan quarter-on-quarter, scale effects were not enough to offset the impact of declining sales prices.

Broadly, outside competitors have launched bigger, cheaper range-extended SUVs to compete with the Li Auto L series, pushing competition to the boiling point. Internally, the more affordable "6 series" in the 200,000+ yuan bracket became the sales mainstay. In Q4, due to battery supply chain restrictions, the i6 averaged only 9,500 units per month, impacting overall margin.

Overall, Li Auto is under pressure on market share and relying heavily on entry-level models. From annual data, L6 and i6 account for over half of sales, wearing down Li Auto’s previously high-end brand positioning.

Li Auto may have to endure this pressure for some time.

Looking ahead to Q1, revenue guidance is just 20.4–21.6 billion yuan, down 16–21% year-on-year. Implied average car price will drop sharply from 250,000 yuan to 222,000 yuan. As Q1 sales decline leads to higher fixed cost allocation and recent increases in bulk raw material prices, gross margin is expected to fall further.

Organizational Defense

Faced with pressure, external market competition and macro headwinds are objective factors, but Li Auto management decided to address internal issues.

Li Auto first reflected on the morale issue at the grassroots.

"Our biggest problem was managing company-owned stores with dealer-style methods," Li Xiang admitted at the earnings call. The direct sales model was intended to retain pricing, service, and user experience control in-house. But during rapid expansion, the model became distorted.

Previously, some stores were misplaced in second-tier malls with declining traffic, dispersing valuable sales power and reducing per-store customer acquisition, dragging down conversion rates overall.

In traditional dealer mode, dealers bear their own profit and loss, so are highly motivated for each order. In Li Auto's previous direct sales model, managers acted more like senior employees without real control over store location, staffing, or profit allocation.

In smooth markets, salespeople relied on strong product definition to sell cars effortlessly. In tough times, when all brands fight hard and cut prices, this lack of deep interest-binding exposed inefficiency and low fighting power. Ma Donghui said at the earnings call that blind store expansion and outreach occurred due to management mechanism flaws.

To address organizational ailments, Li Auto’s first strong medicine for 2026 is restructuring sales. From March this year, Li Auto implemented a "Store Partner" plan—making store managers true “operators.”

Ma Donghui explained: stores become the basic business unit. Company will delegate “business decision-making” and “profit-sharing” rights to store managers, giving them acquisition, business, and team management autonomy. New store locations will no longer be decided by headquarters alone, but by managers personally involved, directly tying responsibilities to individuals.

Li Xiang aims to create a “million-yuan earner” catfish effect: “When car sales teams generally don’t make money, we want to train many managers earning over a million yuan annually, double or triple the industry average.”

With interests tightly bound, Li Auto hopes to truly energize front-line teams and make store managers treat the business as their own.

In channel layout, Li Auto hit the brakes. Regarding rumors of “closing 100 stores”, Ma Donghui clarified this is a normal business optimization of a small number of inefficient stores unable to meet sales targets.

For 2026, Li Auto’s channel strategy shifted from “quantity” to “quality.” New stores will abandon traffic-scarce mall locations for top shopping centers and high-quality auto cities, focusing on densification in core cities. With financial and digital tools, Li Auto aims for visible business improvement from the new sales system by Q3 this year.

Defending the Base

Channels are the supply pipeline, but ultimate victory depends on products.

Internally, Li Auto proposed the “3+2 strategy.”

Three core strategies: first, improve sales system management; second, successfully upgrade the L series starting with the new L9; third, stabilize growth in pure electric models, including i6, i8, MEGA, and the upcoming i9 in the second half of the year.

Two supporting strategies: first, leverage past years’ investments in smart tech, including chips, models, and various capabilities, to provide a completely new product experience this year. Second, make progress and expansion overseas.

At the earnings call, Li Xiang stated that 2026 will see delivery of the third-generation platform, with confidence in product and technology competitiveness this year.

However, market competition is intensifying: this year, the number of new mid-to-high-end NEVs (above 200,000 yuan) equals the past three years combined, yet overall market growth is limited. NIO’s Li Bin noted to Wall Street Insights that the Chinese passenger car market will shrink this year and next.

Stabilizing the base is critical. The L series is Li Auto’s cash cow and cannot fail.

In Q2 this year, Li Auto will launch three major new L series models in succession, firing the first shot in a counterattack. The key is the new generation Li Auto L9, launched with an "more features, lower price" approach. The new L9's price band will fall into the original L8 range—320,000–380,000 yuan.

In terms of specs, the new L9 uses the pure electric series’ 800V platform and 5C supercharging, plus range extender 3.0. By streamlining SKUs and offering full specs at entry-level, Li Auto hopes to use super cost-value and experience advantages to upgrade L9's competitiveness from pure “product definition” to “tech barriers,” to resist even fiercer internal competition in 2026 and defend this critical profit territory.

In pure EVs, Li Auto is digesting previous mistakes. In Q1, by introducing a second battery supplier, the blockbuster i6’s capacity bottleneck eased, with full release expected in Q2. Meanwhile, reputation drove a doubling of i8 orders in March.

In H2 2026, Li Auto will launch a new flagship pure electric SUV—the Li Auto i9. With i6, i8, and i9, Li Auto is carefully rebuilding its pure electric lineup, aiming to finally stabilize its EV business.

"In such a fierce competitive environment, we must do '3+2 strategy' well to achieve this year's sales goal of 20% growth over last year," said Li Xiang.

All-In On Robots

In headwinds, Li Auto is betting on a ten-year comeback.

Last year, Li Auto invested a total of 11.3 billion yuan in R&D, with Q4 R&D alone reaching 3.02 billion yuan—exceeding expectations. Over 50% (more than 6 billion yuan) went to AI-related fields.

Management agreed: past excessive focus on R&D efficiency—cutting R&D as revenue slowed—led to slower tech iteration and model launches. So, even under sales pressure, Li Auto will not cut R&D but may further increase it.

In Q2, the flagship L9Livis will debut two self-developed "Mach 100 (M100)" chips using 5nm process. Each vehicle’s dual-chip effective computing power is 5–6 times that of Thor-U, enabling integrated "self-developed algorithm + computing power."

Li Xiang painted a broad technological vision at the earnings call: 2026 will be the key year for Li Auto to evolve into an "embodied intelligence" company.

In operations, L9Livis will have full-by-wire chassis: steer-by-wire, all-electric braking, four-wheel steering, and 800V active suspension. Vehicles won’t rely on traditional MCU instruction transfer; models can directly output control actions.

Recent news suggests Li Auto's R&D is extending into "space robots," with the first embodied double-wheel robot expected to debut in H1 this year. Li Xiang firmly believes future cars will no longer be mere transport tools, but intelligent, active embodied entities.

Li Xiang commented on recent high-level departures for entrepreneurship: "Since the beginning of the year, there have indeed been some changes. Many have followed Li Auto from zero, and now launching startups, they’ve gained investment market recognition," he said, offering congratulations.

He added, "It also gives some younger technical and business managers great opportunities."

Li Xiang revealed that in core areas like base models, embodied intelligence, and product lines, many 90s and 95s generation members have taken leadership roles, and 00s generation recruits from the past three years became core pillars for technical R&D and tackling hard tech challenges. This marks the company’s confidence for the next decade.

Looking back, from 11 consecutive profitable quarters to now falling below healthy gross margins and core business nearing losses, Li Auto is in a bitter transformation. But this is not the end. By the end of last year, Li Auto still held over 100 billion yuan in cash. This war chest is the ballast stone supporting Li Auto's stable R&D and organizational restructuring amidst adversity.

The battle for 2026 has begun. Li Auto has no way back—only to dance on the edge of the cliff.

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