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Author | Chai Xuchen
Editor | Zhou Zhiyu
In the past year, the ideal days of discussing AI and transforming to pure electric have not been easy.
On the evening of March 12, Li Auto submitted its financial report for the fourth quarter and the entire year of 2025. For a long time, Li Auto was the only company among the new domestic car manufacturers that could consistently maintain a gross margin of over 20% and achieve sustained significant profits. However, this time Li Auto also walked the tightrope of breakeven.
&#34;The past year has been an important strategic adjustment period for Li Auto,&#34; said Li Auto Chairman and CEO Li Xiang during the earnings call. In this period referred to as &#34;pain and reconstruction,&#34; Li Auto not only had to face fierce external price wars and setbacks in the transition to pure electric but also needed to conduct a profound internal organizational reflection.
<h2>Under the Cold Winter</h2>
Last year's cold winter was indeed difficult for Li Auto.
From the financial report data, in the fourth quarter, Li Auto faced dual pressure on revenue and profit. During the quarter, Li Auto's operating profit turned into a factual loss of 400 million. In comparison, the operating profit in the previous quarter was still at the breakeven edge (–70 million) after excluding the impact of the Mega recall.
This is the first time since 2023 that Li Auto has been in a &#34;tightrope&#34; state regarding operating profit.
The final financial report showed a positive net profit figure, but this was not due to profits from the main business of selling cars, but rather heavily reliant on interest income generated from the company's large cash reserves (approximately 430 million).
It is worth mentioning that Li Auto's management had long adhered to a bottom line: a gross margin of around 20% is the cornerstone of the company's healthy development. However, in the fourth quarter, Li Auto's actual gross margin from car sales was only 16.8%. This figure declined by 3 percentage points compared to the real gross margin of 19.8% in the third quarter after excluding the impact of the Mega recall.
This decline was due to the overall drop in selling prices. From the perspective of the single vehicle economic model, the situation is even more intuitive.
In the fourth quarter, the actual gross profit from selling one vehicle for Li Auto was only 42,000 yuan, continuing to decline by 13,000 yuan from the previous quarter's 55,000 yuan (after excluding the impact of the Mega recall). Although the cost per vehicle decreased by 15,000 yuan quarter-on-quarter, the release of scale effects was insufficient to offset the impact of the drop in selling prices.
Looking at the broader perspective, external competitors have launched larger and cheaper extended-range SUVs that benchmark against Li Auto's L series, intensifying the competition. Internally, the entry-level &#34;6 series&#34; priced over 200,000 yuan has become the main sales force, while in the fourth quarter, constrained by battery supply chain limitations, the average monthly sales of the i6 were only 9,500 units, affecting the overall gross margin.
In summary, Li Auto is currently facing pressure on overall market share and a situation where the entry-level models are propping up sales. From the annual data, the L6 and i6 models accounted for more than half of the sales, which has caused some wear and tear on the originally high-profile Li Auto brand
Under such pressure, Li Auto may have to endure for a while longer.
From the first quarter's outlook, the revenue guidance is only 20.4-21.6 billion, a year-on-year decline of 16%-21%, implying that the average selling price of cars will continue to drop significantly from 250,000 yuan to 222,000 yuan. With the sequential decline in sales volume in the first quarter leading to an increase in fixed cost allocation, coupled with the recent rise in bulk raw material prices, the gross margin of vehicles in the first quarter is expected to continue to hit new lows.
<h2>Organizational Restructuring</h2>
Faced with pressure, the external market's competition and macro headwinds are objective factors, but Li Auto's management has chosen to turn the blade inward.
In this crisis, Li Auto's first reflection is on the morale of the grassroots.
&#34;Our biggest problem in the past was managing the direct sales system with a dealership management approach,&#34; Li Xiang admitted this management flaw at the earnings conference. The original intention of the direct sales model was to firmly grasp pricing power, service standards, and user experience in its own hands. However, during the period of rapid and extensive expansion, this model became distorted.
In the past, some of Li Auto's store locations were misaligned, dispersing valuable sales forces in second-tier supermarkets with declining foot traffic. This led to a significant reduction in the customer acquisition capability of individual stores when the market environment turned sharply, lowering the overall lead conversion rate.
Under the traditional dealership model, dealership owners bear their own profits and losses, possessing a strong motivation to compete for every order. In Li Auto's previous direct sales system, store managers were more like senior employees. They did not have real decision-making power regarding store locations, personnel appointments, and profit distribution.
In favorable conditions, relying on the product's strong defining capability, sales personnel could sell cars without much skill. However, in adverse conditions, when all brands are fiercely competing and drastically lowering prices to attract customers, this direct sales system, lacking deep binding of interests, immediately exposes issues of inefficiency and lack of combat effectiveness.
Ma Donghui stated at the earnings conference that the past issues of blindly opening stores and expanding store exhibitions ultimately stemmed from problems in the management mechanism.
In the face of organizational ailments, Li Auto's first strong medicine proposed for 2026 is to reconstruct the sales system. Starting in March of this year, Li Auto has implemented the &#34;Store Partner&#34; program. Li Auto aims to truly transform the store managers of direct sales stores into &#34;operators&#34; of the stores.
Ma Donghui explained the core of this mechanism in detail: stores will become the most basic operating units of Li Auto. The company will delegate &#34;operating decision-making power&#34; and &#34;profit-sharing rights&#34; to store managers. This means that store managers will have autonomy in customer acquisition, operations, and team management. Future new store locations will no longer be determined by headquarters in isolation but will involve store managers in the evaluation process, with responsibilities directly tied to individuals.
Li Xiang intends to create a &#34;million-dollar annual income&#34; catfish effect: &#34;In today's environment where the automotive sales system is generally unprofitable, we hope to cultivate a large number of store managers whose annual income exceeds one million, allowing outstanding store managers' income to reach two to three times the industry average.&#34;
Through deep binding of interests, Li Auto attempts to fundamentally stimulate the combat effectiveness of frontline teams, allowing store managers to truly treat the stores as their own businesses.
In terms of channel layout, Li Auto has stepped on the brakes. In response to rumors of &#34;closing 100 stores,&#34; Ma Donghui clarified that this is a normal operational optimization for a small number of inefficient stores that cannot support sales targets
In 2026, the core idea of Li Auto's channel construction shifted from &#34;emphasizing quantity&#34; to &#34;emphasizing quality.&#34; New stores will decisively abandon traffic-exhausted business circles, prioritizing top shopping malls and high-quality auto cities, with a focus on strengthening presence in high-tier cities. Empowered by financial and digital tools, Li Auto strives to achieve visible operational improvements from this new sales system in the third quarter of this year.
<h2>Maintaining the Base</h2>
Channels are the pipelines for delivering ammunition, but ultimately, it is the product that determines victory or defeat on the battlefield.
Internally, Li Auto has proposed a &#34;3+2 strategy.&#34;
Three core strategies: First, manage the sales system effectively; second, ensure the successful upgrade of the L series, led by the all-new Li Auto L9; third, stabilize the volume of pure electric models, including i6, i8, MEGA, and the i9 set to launch in the second half of the year.
Two auxiliary strategies: Li Auto's investments in intelligence over the past few years, including chips, models, and various research capabilities, will manifest in a completely different product experience this year. On the other hand, there will also be progress and expansion overseas.
At the performance meeting, Li Xiang stated that 2026 is the year of delivery for the third-generation platform, and there is confidence in this year's product and technological competitiveness.
However, competition in the entire market is also intensifying. This year, the number of new cars in the mid-to-high-end new energy market above 200,000 yuan is equivalent to the total of the past three years, while the overall market's incremental growth is quite limited. Nio Chairman Li Bin pointed out to Wall Street that the entire domestic passenger car market will shrink in the next two years.
Stabilizing the base is currently of utmost importance. The L series is Li Auto's profit cow and must not be lost.
In the second quarter of this year, Li Auto will launch three major facelift models of the L series, firing the first shot of a counterattack. Among them, the all-new Li Auto L9 carries significant responsibilities. Li Auto has adopted a &#34;more features at a lower price&#34; strategy. The overall price range of the new L9 will drop to the 320,000-380,000 yuan range where the original L8 series was located.
In terms of configuration, the new L9 utilizes the pure electric series' 800V platform and 5C ultra-fast charging, along with the range extender 3.0 system. By streamlining SKUs and ensuring full configuration from the entry level, Li Auto aims to upgrade the competitiveness of the L9 from mere &#34;product definition&#34; to &#34;technical barriers,&#34; in order to withstand the more intense competition in the range extender segment in 2026 and firmly hold onto this crucial profit territory.
In the pure electric field, Li Auto is digesting previous mistakes. In the first quarter, by introducing a second battery supplier, the production capacity bottleneck of the popular model i6 began to ease, and it is expected to achieve a complete release of capacity in the second quarter; at the same time, the power of word-of-mouth has led to a doubling of orders for the i8 in March.
In the second half of 2026, Li Auto will also launch a brand new pure electric flagship SUV, the Li Auto i9. Through the i6, i8, and the upcoming i9, Li Auto is cautiously reconstructing its pure electric product matrix, attempting to establish a solid footing for its pure electric business.
&#34;In such a fiercely competitive environment, we must implement the '3+2 strategy' to truly support our sales target of over 20% growth compared to last year,&#34; Li Xiang said
<h2>High-Stakes Robotics</h2>
In the face of headwinds, Li Auto is betting on a comeback for the next decade.
In the past year, Li Auto's R&amp;D investment reached 11.3 billion yuan, with the R&amp;D expenses in the fourth quarter alone hitting 3.02 billion yuan, even exceeding market expectations. Among this, a staggering 50% (over 6 billion yuan) was directed towards AI-related fields.
The management team of Li Auto reached a consensus during a strategic reflection meeting: the past excessive pursuit of R&amp;D cost-effectiveness, coupled with revenue declines leading to R&amp;D cuts, has slowed down technological iterations and model launches. Therefore, even under sales pressure, Li Auto's subsequent R&amp;D expenses will not only remain stable but may even increase.
On the flagship model L9 Livis, set to be released in the second quarter, Li Auto will first equip it with two self-developed &#34;Mach 100 (M100)&#34; chips manufactured using a 5nm process. The effective computing power of these dual chips per vehicle is 5 to 6 times that of Thor-U. With this, Li Auto will achieve the integration of &#34;self-developed algorithms + self-developed computing power.&#34;
Li Xiang painted a grand technological vision at the earnings conference: 2026 will be a crucial year for Li Auto's evolution into an &#34;embodied intelligence&#34; enterprise.
On the execution front, the L9 Livis will feature a fully drive-by-wire chassis, including steer-by-wire, fully electric mechanical brakes, four-wheel steering, and an 800V active suspension. The vehicle will no longer rely on traditional MCU inter-transmission of commands; the model can directly output actions to the control system.
Recent news indicates that Li Auto's R&amp;D efforts have officially extended to &#34;spatial robotics,&#34; with the first embodied intelligent dual-wheel robot expected to debut in the first half of this year. Li Xiang firmly believes that future vehicles will no longer be traditional means of transportation but will become embodied intelligent entities with vitality and proactivity.
In response to the recent departures of several senior executives to start their own ventures, Li Xiang remarked, &#34;There have indeed been some new changes in the company since the beginning of the year. Those who have experienced the journey from zero with Li Auto and recently ventured out to start their own businesses have gained recognition in the investment market,&#34; to which he expressed his congratulations.
He also stated, &#34;This also provides very good opportunities for some young technical managers and business managers within the company.&#34;
Li Xiang revealed that many post-90s and post-95s have already taken on key roles in core businesses such as foundational models, embodied intelligence, and product lines. The post-00s graduates cultivated over the past three years have also become core backbones in technical R&amp;D and tackling high-difficulty technical solutions, which is a sign of the company's confidence in the next decade.
Looking back, from a continuous 11-quarter profit myth to now falling below the healthy gross margin line and nearing losses in its main business, Li Auto is undergoing a painful transformation period. But this is by no means the end for Li Auto. As of the end of last year, Li Auto still had over 100 billion yuan in cash on hand. This war chest is the ballast that allows Li Auto to stabilize R&amp;D and undergo organizational restructuring amid adverse conditions.
The battle for 2026 has already begun. Li Auto has no way out and can only dance on the edge of the cliff

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Building strength for the next decade

- In a challenging year, Li Auto reported significant financial struggles, facing a loss of 400 million yuan in operational profit for Q4 2025, marking its first loss since early 2023.  
- The company's gross profit margin for vehicle sales dropped to 16.8%, influenced by competitive pricing and supply chain issues, while management announced a strategic shift to empower store managers for improved efficiency.  
- Amidst declining performance, Li Auto plans to invest heavily in R&D, particularly focusing on AI, to innovate and maintain market share in an increasingly competitive electric vehicle landscape.

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Li Auto

Hua Xia CSI New Energy Vehicles ETF

E Fund CSI Auto Components Thematic ETF

ChinaAMC CSI Hong Kong Connect Automobile Industry Thematic ETF

Hwabao WP CSI Intelligent Electric Vehicle ETF

Guotai CSI 800 Automobile and Parts ETF

Li Auto is involved in a pressure race, heavily investing in AI to break through